I’ve been doing some research on merger arbitrage oppunities lately and think that its an interesting thing to talk about. Those of you in Investments 4502 at Carleton will have seen this, but essentially, it has been found that when an offer is made for a target company at a premium, that company’s stock price will not fully rise to the amount of the offer. This is because there is an inherant risk of the merger not being totally completed. So, an announcement is made for a certain premium on a certain date, a fraction of the premium will be represented in the subsequent day’s opening. As the merger is completed, the premium is fulfilled.

The underlying strategy for merger arbitrage is to go long on the targets share after the annoucement is made hoping that the merger is consumated. An investor could also short the acquierer since historically speaking, the acquirer’s stock deflates in the event of a tender offer. There are also variations of this strategy that indicate at what weights an investor should engage each position long or short. Also, there is a method of indication on which company an investor should long or short in all stock mergers (out of the scope of this post).

Either way, I’ve done some work to validate these findings and low and behold, it works! Mind you I’ve only taken ten samples from the past six months to show this (although, doing i in the last six months may show that the results are immune to systematic events). But either way its interesting. All of the return papers I’ve read this week all suggest that there is an excess monthtly return to be made.

The question is then, why doesn’t everyone do it? My answer is, I don’t know! Obviously this is not a riskless arbitrage as it can be argued that there is no such thing; this may scare some people into diving in. I also don’t think that many investment students have had the opportunity to study mergers in depth.

Here’s a video from Bloomberg TV that gives a good example of this strategy

Also, there’s a site on Reuter’s that show’s arbitrage spreads. This is the difference between a target company’s stock price after annoncement and the deal price. It is said the the larger the spread, the lower the probability that the merger will take place however, the greater reward an arbitrager will reap if the merger is completed. Risk and return right!?

http://www.reuters.com/finance/deals/arbitrageSpreads

Anyways, I don’t think merger arbitrage is too goo to be true at all! Its a strategy that seems legitimate. Just remember that it may be a good idea to read up on merger completion probabilities before you think about trying this. A better understanding of that, the better chance that you’ll be able to profit overall!

I watch quit a bit of BNN today because the CEO of AIG, Edward Liddy, spoke in front of congress regarding the bonuses that were handed out to executives this month. In case you didn’t hear, $165 million in bonuses were approved by the head of AIG. This comes recently after the U.S. Government granted AIG upwards of $180 billion of the TARP fund that’s designed to prevent major companies from being destroyed.

Now, of course I have a feeling of betrayal in me knowing that the executives of companies are being compensated immensely for failure, however there is one sub topic that I think is absurd.

During the congressional hearing today, a congressman by the name of Barney Frank suggested that the names of the executives should be given up. He mentioned that if Liddy was uncooperative to his request, Frank would submit a request to congress for a subpoena to force AIG to reveal the people who have received the bonuses.

http://www.bnn.ca/news/7946.html

I have a problem with that. The executives of AIG have occasionally received death threats on their own lives, threats to hurt their families and even as far as vandalizing their personal property. If this is already happening to the public members of AIG, what do you think will happen when the people who received bonuses are revealed? They’ll most certainly take the heat on their personal lives on top of their professional lives. I know that it is in bad taste for these managers to accept this compensation but the fact of the matter is that it isn’t an illegal move, it is also up to the firm itself to allow bonuses of this effect to happen. It is not fair to the people whose lives are threatened because of their professional lives.

Ya know, if these executives just threw me a little of their bonuses, maybe I’d even support what they’ve been given! Not likely.

Anyways, the financial economy seems like a circus these days and I consider this story like a sideshow.

Here’s a video of Rep Barney Frank talking about the AIG bonuses on the Today Show

I want to know when you think the economy will be back on the upward slope.

A lot of market strength comes from investor confidence. I personally think that there will be a delay between when the economy will return to being in good shape intrinsically and the reflection of this in stock prices. I say this because it’s going to take some time for the timid investors to show faith in the market not tanking again. Regardless of what’s being reported in firms’ financial reports.

Anyways, what do you think?

 

It will be interesting to see if what the poll says the majority vote is and compare that to when the economy has been deemed ’safe’. My hypothesis is that it will be very similar. Being that this is my second day with this blog, I doubt we’ll find anything substantial.

I re-discovered a good blog authored by a friend of mine. It’s really quite interesting. He submits about sports, the environment, corporate environmental policies, alternative power generation and the likes. I would say that its a pretty environmentally considerate blog.

Check it out, you could learn a thing or two. Not to mention, the name of the site is pretty cleaver

http://thegreenhowseeffect.wordpress.com/

What’s up everyone?

This is my first go at this world we call blogging. So I figured I’d leave an open forum to this one. Comment and let me know what your thoughts these days on the current financial world. Let me know what you think about Madoff’s ascent to corporate crime’s history books. Or how about the recession? What about the fact that if you were to have correctly timed the financial stocks this week, you’d have made a solid profit (assuming you didn’t invest 8 months to a year in them as well).

 I’m a student of finance in Canada, I’m a sports fan (hockey being the most prominent interest), and I’m a fan of on-line collaboration.

Here’s a decent video of Letterman doing a Bernie Madoff Top Ten List (Fast forward to about the 3:30 mark)

 Send me a few messages. Lets get this blog going!

Sean