36 lines
2.6 KiB
Plaintext
36 lines
2.6 KiB
Plaintext
454 Part IV: Additional Considerations
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If more than 50% of XYZ should be accepted in the tender offer, then a larger
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profit will result. Also, if XYZ should subsequently trade at a high enough price so
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that the July 50 put has some time value premium, then a larger profit would result
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as well. (The arbitrageur would not exercise the put, but would sell the stock and the
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put separately in that case.)
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Partial tender offers can be quite varied. The type described in the above exam
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ple is called a "two-tier" offer because the tender offer price is substantially different
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from the remaining price. In some partial tenders, the remainder of the stock is slat
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ed for purchase at substantially the same price, perhaps through a cash merger. The
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above strategy would not be applicable in that case, since such an offer would more
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closely resemble the "any and all" offer. In other types of partial tenders, debt secu
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rities of the acquiring company may be issued after the partial cash tender. The net
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price of these debt securities may be different from the tender offer price. If they
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are, the above strategy might work.
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In summary, then, one should look at tender offers carefully. One should be
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careful not to take extraordinary option risk in an "any and all" tender. Conversely,
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one should look to take advantage of any "two-tier" situation in a partial tender offer
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by buying stock and buying puts.
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PROFITABILITY
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Since the potential profits in risk arbitrage situations may be quite large, perhaps 3
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or 4 points per 100 shares, the public can participate in this strategy. Commission
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charges will make the risk arbitrage less profitable for a public customer than it
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would be for an arbitrageur. The profit potential is often large enough, however, to
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make this type of risk arbitrage viable even for the public customer.
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In summary, the risk arbitrageur may be able to use options in his strategy,
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either as a replacement for the actual stock position or as protection for the stock
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position. Although the public cannot normally participate in arbitrage strategies
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because of the small profit potential, risk arbitrages may often offer exceptions. The
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profit potential can be large enough to overcome the commission burden for the
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public customer.
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PAIRS TRADING
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A stock trading strategy that has gained some adherents in recent years is pairs trad
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ing. Simplistically, this strategy involves trading pairs of stocks - one held long, the
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other short. Thus, it is a hedged strategy. The two stocks' price movements are relat
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ed historically. The pairs trader would establish the position when one stock was |