At HCA, a leveraged buyout has been anounced at a stock price of $51 as of 07/18 pending shareholder approval. The stock currently is trading at $48. Why would I not buy all the stock I can now at $48. Don't the shares have to be bought out at $51?
2006-07-24 04:51:17 · 7 answers · asked by jimmy5454 2 in Business & Finance ➔ Investing
What you are thinking about doing has a name -- it is called "Risk Arbitrage." It is a game that is played by the big boys. The word "risk" is there for a reason.
Three things can happen.
1. The deal goes through and you get a profit of $3.00 per share If this happens quickly, you make a nice profit. If it takes a long time for the deal to go through, you might be better off in T-Bills.
2. The deal falls apart, and you are stuck with something that is worth considerably less than what you paid.
3. Someone else comes in & makes a counter-offer. Prices go through the roof and you make a killing.
As they like to say at The University of Chicago -- there is no free lunch.
2006-07-24 06:29:14 · answer #1 · answered by Ranto 7 · 0⤊ 0⤋
Right now the company is trading at $49.50. That means the market is pricing in $1.50 of risk premium and time value. The stratagey you are talking about is called risk arbitrage where you buy the target and short sell the bidder. There is a chance that the buyout won't be approved and the fact you would be getting the money in the future accounts for the $1.50 discount. When you add leverage and stock into the mix, it gets more complicated as to what ratio you should be buying and selling the each stock.
2006-07-24 04:59:22 · answer #2 · answered by The Time 2 · 0⤊ 0⤋
They call that risk arbitrage because the deal can fall through. If the deal does indeed go through, then the buyout would be at $51 per. The question: will the buyout go through? That's where the risk part comes in. Are you willing to take that risk?
2006-07-24 04:58:33 · answer #3 · answered by 4XTrader 5 · 0⤊ 0⤋
No, the stock doesn't HAVE to be bought at $51. The deal could fall apart for any number of reasons. In addition, I see it trading at $49.34 at noon eastern. If the deal takes 6 months to close that is a return of just less than 7% annualized. You can get 5% in treasuries and not take the risk that the deal won't get done.
2006-07-24 04:58:15 · answer #4 · answered by Oh Boy! 5 · 0⤊ 0⤋
You've to include into your decision whether this buyout is perceived to add value to the company that is buying it or not. Perception plays a big part, and risk arbitraguers play both the number game and qualitative factors.
2006-07-24 04:58:52 · answer #5 · answered by SmartySmiley 1 · 0⤊ 0⤋
Being incorrect is oftentimes a studying journey (or it may be). in many cases, you are able to learn extra with the aid of being incorrect than you are able to nicely be from being suitable. unusual how maximum religions seem to think of that existence isn't a studying journey and that some form of eternal existence is the "fee" for being suitable or incorrect.
2016-10-08 06:36:37 · answer #6 · answered by ? 4 · 0⤊ 0⤋
deal can always fall through. This is what risk arb guys trade for a living.
2006-07-24 04:55:25 · answer #7 · answered by Rich M 3 · 0⤊ 0⤋