Case 49: General Electric's Proposed Acquisition Of Honeywell
1. Jessica Gallinelli should hold position in Honeywell and take short position in General Electric Company (GE) simultaneously
The main consideration in her decision is when she heard disturbing news about the proposed bid by General Electric Company (GE) for Honeywell International Inc. This merge is obviously an arbitrage opportunity. Generally and predictably, there will be different positions for the stock price tendency. For the target company, the stock price normally will increase whereas the stock price of the merger company is likely to drop after the announcement of acquisition released. Therefore, it would be the great opportunity for Gellinelli to buy Honeywell shares and short-sell in GE in order to take advantage of this arbitrage opportunity.
2. What is a reasonable share value range for Honeywell?
Valuation Method
Low Value
High Value
Recent market prices
$30.37
$36.85
Peer firms (median)
$35.30
$59.03
Peer transactions: Aerospace Industry and “Jumbo” deal (median)
$36.70
$50.20
Discounted cash flow (DCF)
$31.56
$40.98
Stand-alone valuation
$33.41
$58.73
With-synergies valuation
$36.32
$48.69
These valuations have given a multiple ranges of reasonable price, some of them have given a larger range, and some have given a tiny range. However, DCF would be the most accurate as it really mirrors the expected future firm’s performance based on some relevant assumption made initially. In this case, the worst scenario will have terminal growth rate at 5% and the best scenario will have the terminal growth rate at 7%. Therefore, the reasonable share value range for Honeywell International should be $31.56-$40.98/share.
3. What is the return on investment for Gallinelli’s arbitrage position?
ARB RETURNS ESTIMATION
Position and Payoff in Target Shares
Buy Target shares at
$41.16
Value of Target Shares at End of Holding Period
$41.82
Gross Spread Per Share on Target shares
$0.66
Total value of Gross
The main consideration in her decision is when she heard disturbing news about the proposed bid by General Electric Company (GE) for Honeywell International Inc. This merge is obviously an arbitrage opportunity. Generally and predictably, there will be different positions for the stock price tendency. For the target company, the stock price normally will increase whereas the stock price of the merger company is likely to drop after the announcement of acquisition released. Therefore, it would be the great opportunity for Gellinelli to buy Honeywell shares and short-sell in GE in order to take advantage of this arbitrage opportunity.
2. What is a reasonable share value range for Honeywell?
Valuation Method
Low Value
High Value
Recent market prices
$30.37
$36.85
Peer firms (median)
$35.30
$59.03
Peer transactions: Aerospace Industry and “Jumbo” deal (median)
$36.70
$50.20
Discounted cash flow (DCF)
$31.56
$40.98
Stand-alone valuation
$33.41
$58.73
With-synergies valuation
$36.32
$48.69
These valuations have given a multiple ranges of reasonable price, some of them have given a larger range, and some have given a tiny range. However, DCF would be the most accurate as it really mirrors the expected future firm’s performance based on some relevant assumption made initially. In this case, the worst scenario will have terminal growth rate at 5% and the best scenario will have the terminal growth rate at 7%. Therefore, the reasonable share value range for Honeywell International should be $31.56-$40.98/share.
3. What is the return on investment for Gallinelli’s arbitrage position?
ARB RETURNS ESTIMATION
Position and Payoff in Target Shares
Buy Target shares at
$41.16
Value of Target Shares at End of Holding Period
$41.82
Gross Spread Per Share on Target shares
$0.66
Total value of Gross