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Comment by BbzzbB | Hacker News Reader

These mergers never are almost never at parity months before closing. This one isn't even so far a spread, 15% rebate on proposed takeout price. Activision, with an offer from Microsoft for which even Buffett is partaking in the arbitrage, sits at 20%. Even back at the announcement in January, before this market turmoil which can threaten these deals, it traded at a like 14% discount.

With that in mind, special situations are clearly still a valid strategy.

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If the market was highly/certainly confident the deal was going to go through it would be at ~54.20$ or higher (technically, although not likely much higher).

If you're 100% sure the deal goes through then that's essentially a free 6$ per share guaranteed right now.

Out of interest, why higher? Twitter does not pay dividends, and if you discount it to today, the 54,20$ in the future are worth less than 54,20$ today since no interest is paid on these shares? Even when i take inflation into account, the 54,20 have more buying power now than in the future so again I dont see why you would pay more.

Interestingly if the market was 100% sure the deal would go through I'm not really sure how it would work because that would mess up the options chain IV. The main reason would be speculation other's might push it higher before the actual deal. Call hedging will amplify this but it would be weird in this scenario.

EDIT: Actually it could go higher because of people covering cash-covered calls that are exercised or closing shorts that existed before the announcement - see below.

It looks like Twitter actually did go higher then 54.20 on April 5th to 54.57~54.92 [1]

The reason why it did IRL is several factors. One is speculation it could go higher due to volatility/inefficiencies. The biggest reason is most likely hedging against sold call options and closing short positions - which are both essentially positions that the deal won't go through. If somebody sold a share of twitter for 50$ thinking it would go back down but now wants out of the position they must buy the share which increases buying pressure and thus the price. Similarly if somebody sold a cash covered call and is exercised or hedge against it to limit losses they must buy shares at the current price (which is 100x per option). Again this increases buying pressure and thus the share price.

I swear there's a few other reasons I can't think of right now. It's basically from market inefficiency factors. Speculation (of the share value not future company value per-se) and hedging are the main ones in this case. In non-acquisition scenarios other factors include portfolio rebalancing, margin-calls, market orders, and poor order-book liquidity.

[1] I'm seeing different numbers from different sources but they're all around there - I'm not sure if they used sale price or the quote price etc, quoting a stock is a whole can of worms in itself.

Disclaimer: I can't claim to be any type of expert - some of this may be incorrect, and I'm a bit rusty

And that's because a lot of such mergers/buyouts fail.

That's why the price is never on parity.

Putting everything on hold until the merger closes is a severe dereliction of duty.

Indeed, there's no such thing as free money. You get payed (or burned) when trading on these mergers for bearing the risk of the deal failing or renegotiating.

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