OATS -- worth a gamble? (arbitrage bet)

[Leaky Eye]

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i was under the impression that even in cash acquisitions, the market has historically shown that the price paid for the acquired is at the time typically viewed as too high (another example of a winner's curse) and thus in most cases the acquirer's stock falls as a result of the purchase.

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This is probably plainly obvious and not what you are asking at all...

The price movement of the purchaser doesn't matter to you since you are being paid cash for your position. The only reason to short then would be your belief that the short of the purchasers stock is more valuable than the spread in the purchasees stock. They are both reliant on the same event, the deal completing. If one position is more valuable you would just put all your money in that one. No reason to do both.

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further, a "merger arb" bet is just that since you go long one stock and short another where both have (in most cases) similar characteristics & thus you have removed a market risk from your bet. if the market tanks, both stocks will likely fall (and you're covered in that on the short, presuming you've done it right in risk space). if the market jumps, both stocks will likely rise.

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Isn't that a hedge?

[DcifrThs]

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[ QUOTE ]
i was under the impression that even in cash acquisitions, the market has historically shown that the price paid for the acquired is at the time typically viewed as too high (another example of a winner's curse) and thus in most cases the acquirer's stock falls as a result of the purchase.

[/ QUOTE ]

This is probably plainly obvious and not what you are asking at all...

The price movement of the purchaser doesn't matter to you since you are being paid cash for your position. The only reason to short then would be your belief that the short of the purchasers stock is more valuable than the spread in the purchasees stock. They are both reliant on the same event, the deal completing. If one position is more valuable you would just put all your money in that one. No reason to do both.

[ QUOTE ]
further, a "merger arb" bet is just that since you go long one stock and short another where both have (in most cases) similar characteristics & thus you have removed a market risk from your bet. if the market tanks, both stocks will likely fall (and you're covered in that on the short, presuming you've done it right in risk space). if the market jumps, both stocks will likely rise.

[/ QUOTE ]

Isn't that a hedge?

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isn't arbitrage supposed to be risk free? doesn't a directional bet necessarily imply market risk? and thus the "hedge"ing leg of the arb bet completes it in the sense that no additional risk is being taken and the arbitrage is thus a "risk free"ish profit (since market risks are now mostly taken care of).

thats how at least i read it...and again, i don't have a large and deep history with equity transactions analysis so i may be wrong...i would think the purchaser's stock would be sold short until some point at which you're willing to take the market risk outright (again not sure about timing...but an outright bet that is exposed for any serious time period to market movements is, at least in my book, not an arbitrage type bet).

obviously the acquirer's stock trades at a discount due to numerous factors affecting the probability of a deal being done and if it does go through you get paid cash and thats that. but until it does, you are exposed to market forces since stocks in general are often supremely highly correlated with market moves overall.

Barron

[Leaky Eye]

I'm no expert here either. Hopefully someone will chime in if I misspeak.

There is risk in the offer not happening. You are already otherwise shielded from general market movement because the offer has been set, and you have made your purchase. If the acquisition is successful the numbers can't change. Excepting huge movements that force the offer to be withdrawn, or increased.

[DcifrThs]

[ QUOTE ]
I'm no expert here either. Hopefully someone will chime in if I misspeak.

There is risk in the offer not happening. You are already otherwise shielded from general market movement because the offer has been set, and you have made your purchase. If the acquisition is successful the numbers can't change. Excepting huge movements that force the offer to be withdrawn, or increased.

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hmm, that appears to be true so if the deal gets done you're set (in cash deals), and if not, the discount int he stoke price refelcts that probability.

learn something new every day [img]/images/graemlins/smile.gif[/img]

somebody asked why i don't post about equities so much... well, there's your answer: i don't know much about 'em

Barron

[polkaface]

http://www.investopedia.com/articles...rarbitrage.asp

A good primer on Merger Arb.

It's interesting though that the 'formal definition' on investopedia mentions "riskless profit" but the primer on the same site mentions "but things can go wrong and you can lose money."

[Holybull]

So Shoe, are you releasing this as an official play or not?

[Shoe]

The acquisition was approved today.

Congrats to anyone who bought ahead of time for a nice 23% return in less than one month.

Unless you have done your own research and are real big on Whole foods, I would now sell this stock.

My only regret is this thread got turned into more of a flame war as opposed to legitimate discussion that could have possibly led to many more of us getting a nice return.

[scott1]

[ QUOTE ]
The acquisition was approved today.

Congrats to anyone who bought ahead of time for a nice 23% return in less than one month.

Unless you have done your own research and are real big on Whole foods, I would now sell this stock.

My only regret is this thread got turned into more of a flame war as opposed to legitimate discussion that could have possibly led to many more of us getting a nice return.

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Did you have money on this?

[Jimbo]

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Did you have money on this?


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I think SHOE is still fully leveraged in Nintendo but all the investors in his hedge fund should be very pleased with this return.

Jimbo

[Thremp]

Shoe,

I think the problem was the arbitrage title you made when in fact it wasn't an arbitrage at all (and the sole reason I opened this thread since I was like "Oh Oh I know what that is..."). However, it has proved very informative. Sometimes you gotta sift through it all though.