Let’s say, 3 months ago 123 Inc. was trading at $5/share. Then LeeBee Corp. made an offer, to acquire the company for $10/share – a big premium.
Here it is 3 months later, and 123 Inc. is only trading at $8. It’s discounted (by $2) on speculation the deal could fall apart and the stock could plunge. That’s called the spread.
Our example is a little exaggerated but you get the idea. And that idea is the foundation for the trades that follow:
According to Finerman a handful of companies with deals on the table are too sharply discounted – or have spreads that are larger than they should be.
Here’s what she’s looking at:
Target Company Acquirer Spread
Alcon Novartis $0.32
Airgas Air Products & Chem $0.21
Smith Int'l Schlumberger $1.85
General Growth Brookfield $2.25
Source: MKM As of 5/21
What's the trade?
Of those listed above, my favorite arb play is Alcon , says Karen Finerman. Novartis is an A+ quality buyer.
Also, I also think the Smith deal has a high probability of going through and I’m playing upside in Airgas through calls.
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CNBC.com with wires