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Author: Somewhere Big red star, 1000 posts Global Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 163  
Subject: Re: arbitrage Date: 1/26/2004 12:09 PM
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Anyone see any good reasons not to be a buyer at the current price?

Even a guarantee of 50 cents per share doesn't necessarily make it a good deal. How long is the money tied up for? How much of a percentage change will there be? And what are the odds that the deal won't go through? All of it adds to the "buy or not to buy" question.

I figure it like this:

The odds of the deal actually being completed are extraordinarily high. There aren't any antitrust issues to be dealt with since the company isn't being bought out by another leading parking garage company. And with the huge amount of insider ownership invovled, even if every single non-insider voted against the buyout, it would be hard to stop it from happening. If there were ever a sure thing of a deal going through, this would be it.

But, in this world very little is a "sure thing", even this deal, so let's say there's a 95% chance of it going through and a 5% chance of it falling through.

If it does go through, we'd make 50 cents per share. But if it doesn't go through, we'll probably lose a buck or so per share. The price went up by less than a buck on the news, and it would be fare for it to fall by less than a buck if the deal didn't go anywhere. Right? =)

And then you need to figure out how long your money would be tied up for. The announcement said the deal should be completed by the end of the second quarter. In Imperial's case, that's the end of May. To make it easy, let's say a whole four months to close the deal--and possibily earlier, which is a good thing.

So what would one's annual profit on such a transaction be?

A 95% chance of making 50 cents = 47.5 cents
A 5% chance of losing $1.00 = -5 cents
Meaning there's "essentially" a 100% chance of making 42.5 cents.

Giving us a total profit of 0.425 / 25.5 = 1.67%

Seeing that there are actually four months before the deal closes, we need to annualize that number: 5.08%

Then it's a matter of personal preference. Is a "guaranteed" 5.08% annualized return good enough for you? If you think the market is going to tank (like Whitnet Tilson seems to think), that would be a GREAT return! Oh, if only I could have had returns like that in 2001.... 5.08% isn't much, historically speaking, and if the market keeps marching up at its historical average, you'd find a 5.08% return rather disappointing.

Of course, there's a lot of assumptions in that calculation. Perhaps the offering price will be increased? It's not like that's never happened before, although that's usually because there's a lot of opposition to the buyout and in this case, there's not enough insiders to oppose it. It might be the deal is closed within two months, so the annualized return would be twice what the worst-case scenario might be. But then again, maybe it takes longer than four months, making the annualized returns even less. Or maybe if you wait a week, the stock price will fall by 25 cents and you can get a better overall return?

Just stuff to think about. =)

-- Ryan
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