Friday, December 18, 2009

--- UPDATE: --- Bristol-Myers (BMY) : Mead Johnson (MJN) - Understanding a Tender With Options

An update to the previous blog. First one is available HERE for reference.





Preliminary Results
NB: There is a three day protect so we will not know for certain until then.

500,547,697 shares of BMY ended up being tendered (out of a total possible of 2 billion shares).

Since a total of 270 million were able to be tendered and converted to MJN (see earlier blog for details) the conversion ended up being: 270/500.5 = 54%.

Recall we knew that at least 13.5% would be converted - though that lower bound was unrealistic for a number of reasons (again, I direct the reader to the original blog).

Here's how the math worked out:

Version 1: If we assumed everyone would tender
You bought 100 shares BMY for 25.68 (the price as of the first blog).
You sold 14 shares MJN @ 42.49 (the price as of the first blog).

Today End Position and PnL:
Long 46 shares BMY for $25.89
BMY PnL: (46)(25.89 - 25.68) = $9.66 gain

Short 14 shares of MJN for 41.60
MJN PnL: 14(42.49 - 41.60) = $12.46 gain

Converted Shares of MJN: 54 * 0.6313 = Long 34 shares MJN.

54 shares of BMY were worth: (54)($25.68) = $1,386.72
Now 34 shares of MJN are worth: (34)($41.60) = $1,414.40
For a $27.68 gain.

To clean up: Sell your net 20 shares MJN and sell your net 46 shares BMY. Done.

Final Pnl:
$9.66 (long BMY) + $12.46 (short MJN) + $27.68 (converted shares) = $49.80
Or, $49.80/114 = $0.44 per share.


Version 2: If we assumed 50% conversion rate
You bought 100 shares BMY for 25.68 (the price as of the first blog).
You sold 50 shares MJN @ 42.49 (the price as of the first blog).

Today End Position and PnL:
Long 46 shares BMY for $25.89
BMY PnL: (46)(25.89 - 25.68) = $9.66 gain

Short 50 shares of MJN for 41.60
MJN PnL: 50(42.49 - 41.60) = $44.50 gain

Converted Shares of MJN: 54 * 0.6313 = Long 34 shares MJN.

54 shares of BMY were worth: (54)($25.68) = $1,386.72
Now 34 shares of MJN are worth: (34)($41.60) = $1,414.40
For a $27.68 gain.

To clean up: Buy your net short 16 shares MJN and sell your net 46 shares BMY. Done.

Final Pnl:
$9.66 (long BMY) + $44.50(short MJN) + $27.68 (converted shares) = $81.84
Or, $81.84/150 = $0.55 per share.

The option trades can complicate the PnL. Suffice it to say, it looks like the reversal would have been good ~$0.20.

That's the play of a tender. But never underestimate the risk. What if BMY went down and MJN went up today? How does that change the PnL? What if we elimintaed the delta risk through conversions and reversals and tried to just play the spread in the tender? How does that look if the stocks moved backwards to today?

To quote, well, myself: "...no matter how you look it at, it is definitely not a free $1.14."


Legal Stuff:
http://www.livevolpro.com/help/disclaimer_legal.html

No comments:

Post a Comment

Post a Comment