40 lines
3.0 KiB
Plaintext
40 lines
3.0 KiB
Plaintext
Chapter 27: Arbitrage
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TENDER OFFERS
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451
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Another type of corporate takeover that falls under the broad category of risk arbi
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trage is the tender offer. In a tender offer, the acquiring company normally offers to
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exchange cash for shares of the company to be acquired. Sometimes the off er is for
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all of the shares of the company being acquired; sometimes it is for a fractional por
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tion of shares. In the latter case, it is important to know what is intended to be done
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with the remaining shares. These might be exchanged for shares of the acquiring
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company, or they might be exchanged for other securities (bonds, most likely), or
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perhaps there is no plan for exchanging them at all. In some cases, a company ten
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ders for part of its own stock, so that it is in effect both the acquirer and the acquiree.
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Thus, tender offers can be complicated to arbitrage properly. The use of options can
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lessen the risks.
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In the case in which the acquiring company is making a cash tender for all the
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shares (called an "any and all" offer), the main use of options is the purchase of puts
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as protection. One would buy puts on the company being acquired at the same time
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that he bought shares of that company. If the deal fell apart for some reason, the puts
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could prevent a disastrous loss as the acquiring stock dropped. The arbitrageur must
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be judicious in buying these puts. If they are too expensive or too far out-of-the
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money, or if the acquiring company might not really drop very far if the deal falls
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apart, then the purchase of puts is a waste. However, if there is substantial downside
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risk, the put purchase may be useful.
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Selling options in an "any and all" deal often seems like easy money, but there
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may be risks. If the deal is completed, the company being acquired will disappear and
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its options would be delisted. Therefore, it may often seem reasonable to sell out-of
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the-money puts on the acquiring company. If the deal is completed, these expire
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worthless at the closing of the merger. However, if the deal falls through, these puts
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will soar in price and cause a large loss. On the other hand, it may also seem like easy
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money to sell naked calls with a striking price higher than the price being offered for
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the stock. Again, if the deal goes through, these will be delisted and expire worthless.
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The risk in this situation is that another company bids a higher price for the compa
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ny on which the calls were written. If this happens, there might suddenly be a large
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upward jump in price, and the written calls could suffer a large loss.
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Options can play a more meaningful role in the tender off er that is for only part
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of the stock, especially when it is expected that the remaining stock might fall sub
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stantially in price after the partial tender offer is completed. An example of a partial
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tender offer might help to establish the scenario.
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Example: XYZ proposes to buy back part of its own stock It has offered to pay $70
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per share for half the company. There are no plans to do anything further. Based on |