Current Merger Arbitrage Spreads, M&A Deals
The area you can make money in is the difference between the current stock price and the buyer's purchase price (if cash deal). It must be paid in cash, because in this market if a buyer offers a stock for stock deal, then the buyer's stock price is likely to fluctuate. That can eliminate the premium if the buyer's stock price drops significantly.
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Here's a list of likely
Mergers / Acquisitions:
>Constellation Energy Group
(CEG
)-
in September this energy giant accepted an offer from Warren
Buffett's MidAmerican Energy
Holdings for $4.73 billion.
Constellation filed for a shareholder proxy to vote in favor of the
acquisition.
Premium offered: 13.2%
or $3.10
Cash offered per share: $26.50
CEG current price: $23.40
Expected closing: within 7 months
>Rohm & Haas Co.
(ROH)-
to be bought by Dow Chemical Company
(DOW).
Premium
offered: 9% or $6.45
Cash offered per share: $78.00
ROH current price: $71.55
Expected closing: Jan. 2009/ Very early
2009
>Foundry Networks Inc. (FDRY)-
to be acquired by Brocade Communications Systems
Inc. (BRCD) for $2.6
billion.
Premium offered: 10.59% or
$1.58
Cash offered per share: $16.50 cash
FDRY current price: $14.92
Expected closing: Fourth quarter 2008
>Puget Energy Inc. (PSD)-
this deal is pending Macquarie
Bank's ability to borrow $7.4 billion, which is not easy
in these rough economic times.
Premium offered: 15.25%
or $3.97
Cash offered per share: $30.00
PSD current price: $26.03
Expected Closing: End of Dec. 2008
I will
be following more mergers and acquisitions, so stay tuned for more
money making opportunities.
There are chances that these acquisition deals might not go
through, so these gains are not guaranteed, but
likely.
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Make Money on Mergers and Acquisitions
What happens in a typical acquisition is the buyer (acquirer/bidder) makes an offer to buy a company (seller/target) for more than the seller's stock price currently is (premium). This provides an incentive for the target company to accept the offer. As long as the offer is in cash and the deal is successfully executed, there are guaranteed gains for the target company's shareholders.
For example, the popular InBev acquisition of Anheuser-Busch presented a huge profit opportunity. InBev offered $70 in cash for each share of (BUD) stock. If you bought shares of Anheuser-Busch (BUD) on Oct. 29, 2008 (long after the acquisition announcement) at $59.83, you would be almost guaranteed a profit of 17%, or $10.17 a share. Now, with the stock at $68.50 as of Nov. 14, the merger presents only a 2.2% return. Annualized, that return is 13%, so it's still not a bad deal.
Opportunities like this exist more right now than in a more normal stock market because investors are fearful of stocks in general and are just protecting their money. This takes the focus away from situations in mergers as there is a "flight to safety". It is usually hard to find merger opportunities because the market is efficient enough that investors usually buy the stocks up to the offer price as soon as the announcement comes out. Now times are different, and you can take advantage of that.
Like Warren Buffett says, "Be fearful when others are greedy, and be greedy when others are fearful." Now is the time to be greedy when people are fearful.
Making money on acquisitions depends on a few main contingencies:
- The deal must be very likely to go through- research news and shareholder reactions to offers.
- A premium must be presented to the shareholders- the offer should be significantly higher than the current stock price.
- Cash offers are best and easy to value- stock deals can change value because of fluctuations in buyer's stock prices.
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