Arbitrage Assignement
Mergers and Acquisitions
Homework Assignment 1 (revised 9/14/2013)
The attached (end of this file) press release dated 12/16/04 from Symantec (SYMC) describes conditions under which it would acquire Veritas Software (VRTS). Note that will find arbitrage examples and other useful information in the file: “Arb Handouts w-o formulas.xlx” on Blackboard.
This assignment has two parts, A and B.
A. Arbitrage Analytical Analysis (spreadsheet required)
This first part requires that you analyze this transaction from an arbitrageur's viewpoint.
Assumptions Related to Part A: make the following assumptions in your analysis:
Assume that you borrow 40% of any funds you need (i.e. you buy on 40% margin)
You pay interest on borrowed funds at an annual rate of 5%
Any positions you open (long or short) are done on 12/16/2004 at the opening prices on the day of the announcement. Those prices were: SYMC: $26.00, VRTS: $27.99
Other information, such as the exchange ratio can be found in the attached (bottom of this file) Press Release
You incur transaction costs of 0.3% on any stock transaction (buying long or selling short, or buying to cover a short position), but no transaction costs in unwinding your positions if the merger is successful (i.e. no cost in transferring the acquired stock or in covering your short position with stock received in a transfer – the acquiring company pays these costs).
Questions Related to Part A
What will be the % profit or loss on your initial equity investment in the transaction, actual % as well as annualized %, under the following scenarios: 1. The merger is successfully concluded on 05/28/2005 (Press Release projects 2nd Q 2005) 2. The merger is successfully concluded on 12/30/2005 3. The merger offer is withdrawn and canceled on 12/30/2005 at which point VRTS shares are assumed to drop to $22 per share and SYMC shares rise to $27 per share.
4. Discuss Results: briefly describe in narrative form what happens in
Homework Assignment 1 (revised 9/14/2013)
The attached (end of this file) press release dated 12/16/04 from Symantec (SYMC) describes conditions under which it would acquire Veritas Software (VRTS). Note that will find arbitrage examples and other useful information in the file: “Arb Handouts w-o formulas.xlx” on Blackboard.
This assignment has two parts, A and B.
A. Arbitrage Analytical Analysis (spreadsheet required)
This first part requires that you analyze this transaction from an arbitrageur's viewpoint.
Assumptions Related to Part A: make the following assumptions in your analysis:
Assume that you borrow 40% of any funds you need (i.e. you buy on 40% margin)
You pay interest on borrowed funds at an annual rate of 5%
Any positions you open (long or short) are done on 12/16/2004 at the opening prices on the day of the announcement. Those prices were: SYMC: $26.00, VRTS: $27.99
Other information, such as the exchange ratio can be found in the attached (bottom of this file) Press Release
You incur transaction costs of 0.3% on any stock transaction (buying long or selling short, or buying to cover a short position), but no transaction costs in unwinding your positions if the merger is successful (i.e. no cost in transferring the acquired stock or in covering your short position with stock received in a transfer – the acquiring company pays these costs).
Questions Related to Part A
What will be the % profit or loss on your initial equity investment in the transaction, actual % as well as annualized %, under the following scenarios: 1. The merger is successfully concluded on 05/28/2005 (Press Release projects 2nd Q 2005) 2. The merger is successfully concluded on 12/30/2005 3. The merger offer is withdrawn and canceled on 12/30/2005 at which point VRTS shares are assumed to drop to $22 per share and SYMC shares rise to $27 per share.
4. Discuss Results: briefly describe in narrative form what happens in