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Why is Marvel Trading Below Its Acquisition Price? |
by John Jagerson
The Walt Disney Company (DIS) is buying out Marvel Entertainment, Inc. (MVL) in a deal valued at $4 billion. The purchase price is a mix of $30 in cash and .745 of a share of Disney for each share of Marvel. At today's closing prices that means Marvel shareholders will get $49.3998 per share in value for their stock at closing. However, the current share price of Marvel Entertainment, Inc is actually only $48.37 - a full point below the merger value. Why does this discount exist and is there a way traders can take advantage of it?
One of the things we look for when watching for a market bottom is an increase in merger and acquisition (M&A) activity. Lower stock prices are attractive to potential acquirers as they look to consolidate competitors and grab more market share. 2009 may be a great year for this kind of activity if volatility begins to fall.
STOCK PRICES CAN CHANGE EVEN AFTER A MERGER IS ANNOUNCED
A common question relative to M&A activity and its affect on stock prices is why the acquisition target's stock price does not equal the value the acquirer will be paying. In other words if company A is buying Company B's stock for $10 a share in a few months, why doesn't Company B's stock equal $10 now?
UNCERTAINTY LOWERS PRICES
The differential between an M&A target's acquisition price per share and its current trading price accounts for the uncertainty around the merger. Although it is rare, if the purchase never actually happens the target's stock will likely drop significantly. In the video, I will cover a specific case study that you can see in the market today.
HOSTILE TAKEOVERS ARE EVEN MORE UNCERTAIN
The more uncertain the actual merger is, the wider this delta or differential will be. For example, if the target company is being subjected to a hostile or unsolicited takeover the difference between the acquisition stock price and the current stock price will be very wide as management works to fend off the acquirer or attract a "white knight" to rescue it from the larger firm.
THINK BEFORE TRADING
It may be tempting to take advantage of this differential by buying the target's stock and shorting the proper ratio of the acquirer's stock. That strategy has a very poor risk/reward ratio as the downside can be many times the possible upside. Long Term Capital Management (the trillion dollar hedge fund bailed out by the Fed in the late 1990's) famously built a problematic portfolio of leveraged versions of this trade.
OPTIONS MAY BE A BETTER ALTERNATIVE
Alternatively, buying long term puts on the target's stock may be another way to approach the opportunity. This strategy is extremely speculative but the upside could be very large should the merger not occur.
Next: How to Profit from Falling or Rising Home Prices
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