OATS -- worth a gamble? (arbitrage bet)

[DcifrThs]

[ QUOTE ]
[ QUOTE ]
[ QUOTE ]
[ QUOTE ]
OATS cost 14.50 not 2.50, I am talking about the stock not the food.

[/ QUOTE ]
You'll have to excuse Barron, he's a little slow.

This is not even close to an arbitrage situation.

[/ QUOTE ]

WOW, either you're levelling me evan, or both of you missed the humor intended in my post

Barron

[/ QUOTE ]
Okay I'm just going to stop the (apparently) high level posting and just say that I understood the humor in your post and was using some of my own.

[/ QUOTE ]

touche. i am indeed a bit slow

Barron

[DesertCat]

Technically it is arbitrage, specifically merger arbitrage. Whether it's a good deal or not depends upon the deal risk. I guess the market isn't happy the deal architect is about to be fired and possibly prosecuted for securities fraud. That might undercut the possibility of success a bit.

[Evan]

[ QUOTE ]
Technically it is arbitrage, specifically merger arbitrage. Whether it's a good deal or not depends upon the deal risk. I guess the market isn't happy the deal architect is about to be fired and possibly prosecuted for securities fraud. That might undercut the possibility of success a bit.

[/ QUOTE ]
I don't see how anything in the OP indicates that this has anything to do with arbitrage, merger or otherwise. This is just "buying a target company's stock when the deal is uncertain, hoping it goes through," as far as I can tell.

[DesertCat]

I understand that we usually think of arbitrage as "riskless" selling/buying of nearly identical securities/bonds, but the standard definition of what OP is talking about is merger arbitrage. All mergers are uncertain, and all merger arbitrage involves estimating the risks of deal failure and figuring out whether you are being offered the right odds on the gamble, and hedging risks when possible.

I've done a decent amount of merger arbitrage and the spread the OP is describing is huge. It indicates a high likelyhood of deal failure. I usually use the pre-deal announcement average price (over a month or 3 months) as the price in a deal failure scenario. And if the deal is a stock deal you have to short the acquirer to lock in the spread. Because of this I prefer all cash deals.

It's pretty simple to figure out what % likelyhood of success the market is estimating, given the failure price vs. win price. Your job is to determine whether you think that's reasonable or not, and if not, whether there is a big enough margin of safety to take the gamble.

[DcifrThs]

[ QUOTE ]
I understand that we usually think of arbitrage as "riskless" selling/buying of nearly identical securities/bonds, but the standard definition of what OP is talking about is merger arbitrage. All mergers are uncertain, and all merger arbitrage involves estimating the risks of deal failure and figuring out whether you are being offered the right odds on the gamble, and hedging risks when possible.

I've done a decent amount of merger arbitrage and the spread the OP is describing is huge. It indicates a high likelyhood of deal failure. I usually use the pre-deal announcement average price (over a month or 3 months) as the price in a deal failure scenario. And if the deal is a stock deal you have to short the acquirer to lock in the spread. Because of this I prefer all cash deals.

It's pretty simple to figure out what % likelyhood of success the market is estimating, given the failure price vs. win price. Your job is to determine whether you think that's reasonable or not, and if not, whether there is a big enough margin of safety to take the gamble.

[/ QUOTE ]
i think evan, and most, understand the merger arb strategy.

it seems that the OP, however, just wants to outright purchase OATS without the requisite short of whole foods to make the merger arb bet complete.

Barron

[Shoe]

I don't see the point of shorting Whole foods, unless you guys are thinking their price will drop more than wild oats' price if the deal does not go through, and will go up less than OATS if the deal does go through.

[DcifrThs]

[ QUOTE ]
I don't see the point of shorting Whole foods, unless you guys are thinking their price will drop more than wild oats' price if the deal does not go through, and will go up less than OATS if the deal does go through.

[/ QUOTE ]

didn't you say you wanted to run a fund w/ other people's money??

why don't you at least wikipedia "merger arb" and think about it for a second.

Barron

[Shoe]

[ QUOTE ]
[ QUOTE ]
I don't see the point of shorting Whole foods, unless you guys are thinking their price will drop more than wild oats' price if the deal does not go through, and will go up less than OATS if the deal does go through.

[/ QUOTE ]

didn't you say you wanted to run a fund w/ other people's money??

why don't you at least wikipedia "merger arb" and think about it for a second.

Barron

[/ QUOTE ]

I have looked it up and I still don't get it. If the merger gets approved, OATS is going to jump up to the $18.50 range, somewhere around a 25% gain. If the merger gets approved, Whole foods (WFMI) is probably going to go up too, so if the deal gets approved that short would cost me money not make me money.

I'm not planning to hold onto OATS all the way until the deal goes through, I'd sell shortly after the surge of the acquisition being approved assuming the price is in the $18 range. Maybe that isn't merger arbitrage to the letter but I think we all get the idea.

Also, going from what DC said in his post, OATS price today is right in line with where they were last January before the acquistion was announced, so while their price would most likely fall if the deal gets blocked, I don't think it would fall nearly as far as it has the potential to go up. But I also don't know the likliehood of the deal getting approved, which is the only thing stopping me from buying them at this point.

The only way I can see shorting WFMI working is if you were sure they would drop more than OATS if the deal is blocked, and go up less than OATS if the deal is approved, which does seem reasonable to me, which means you could lock in a profit either way. The part i'm not sure on is the which stock would get hit worse if the deal is blocked.

[Evan]

[ QUOTE ]
I also don't know the likliehood of the deal getting approved, which is the only thing stopping me from buying them at this point.

[/ QUOTE ]
Right, so basically you don't know anything relevant. On the bright side, that and $500 will get you an iPhone.

[Evan]

[ QUOTE ]
I understand that we usually think of arbitrage as "riskless" selling/buying of nearly identical securities/bonds, but the standard definition of what OP is talking about is merger arbitrage. All mergers are uncertain, and all merger arbitrage involves estimating the risks of deal failure and figuring out whether you are being offered the right odds on the gamble, and hedging risks when possible.

I've done a decent amount of merger arbitrage and the spread the OP is describing is huge. It indicates a high likelyhood of deal failure. I usually use the pre-deal announcement average price (over a month or 3 months) as the price in a deal failure scenario. And if the deal is a stock deal you have to short the acquirer to lock in the spread. Because of this I prefer all cash deals.

It's pretty simple to figure out what % likelyhood of success the market is estimating, given the failure price vs. win price. Your job is to determine whether you think that's reasonable or not, and if not, whether there is a big enough margin of safety to take the gamble.

[/ QUOTE ]
You're going like 8 steps beyond OP. Seriously, his post (and probably thought process) was pretty much, "Merger being discussed and current price<offer BUYBUYBUY!" Spin in however you like, that's not any kind of arb.