Arbs are having a hard time figuring out how to play Alphabet's (NASDAQ:GOOG) (NASDAQ:GOOGL) Google and its pending acquisition of wearables pioneer Fitbit (NYSE:FIT). Fitbit stock traded as high as $7.26 the day that the $2.1 billion deal was announced more than three months ago -- within sweating distance of the $7.35 all-cash buyout price -- but it has been drifting lower ever since. 

The transaction that is expected to close later this year is no longer a sure thing, and the stock chart bears out the skepticism. Fitbit stock enters this new trading week at $6.64, closer to the $6.18 price it was at the day before the head-turning acquisition was announced than Google's proposed buyout price. You don't need to be a math whiz to know that the market has its doubts about this deal going through anytime soon.

A lady at a gym working out while wearing a Fitbit smartwatch.

Image source: Fitbit.

There is no free lunch or 10.7% return

Arbitrageurs smoke out opportunities in merger announcements. When an all-stock deal is announced, seasoned pros try to assess any pricing inefficiencies in the acquiring stock and the shares of the company being bought out. They naturally also have to weigh the chances of the transaction getting tripped up on the way to the wedding ceremony. If the math adds up an arb can buy shares in the acquiring company and short the equivalent stake in the acquirer, cashing in on the spread when the deal closes. 

An all-cash transaction -- like this one -- is even easier to size up once it's widely assumed that a bidding war won't take place. It boils down to three questions.

  • How big is the discount on the acquired stock?
  • When will the deal close?
  • How likely is the deal to close?

The discount here is widening. Someone buying Fitbit today can lock in a 10.7% return at the $7.35-a-share finish line. Google and Fitbit haven't wavered since the initial announcement of an expected close at some point in 2020, and Google parent Alphabet is good for the money. A risk-free double-digit return in less than a year sounds too good to be true, and that brings us to the strengthening possibility that the deal will falter on the way to the altar.

Fitbit is tiny relative to Alphabet. Google has completed larger deals for Motorola Mobility, Nest, DoubleClick, and more recently, Looker. However, there are looming concerns that regulators may need a little more convincing on what green-lighting this deal would mean. Google hasn't been a major player in wearables, but its recent push into healthcare artificial intelligence leaves some wondering what it could do with the data of Fitbit's more than 28 million registered users. 

Bloomberg is reporting that antitrust officials in the U.S., Europe and Australia are concerned with how Google will use the activity-monitoring data that Fitbit has collected over the years and continues to amass. This doesn't mean that a deal is toast. It also only helps Google that the world's most valuable consumer tech company, Apple (NASDAQ:AAPL), is an even bigger player in wearables than Fitbit. If the deal doesn't go through there's nothing to stop Alphabet from throwing that same $2.1 billion into a heavily subsidized wearables push. 

For now Fitbit investors can't assume that the deal will close anytime soon. The data privacy concerns are real. Fitbit was starting to show signs of life before the deal was announced, but this was still a stock hitting all-time lows last year before the buyout buzz started to percolate. Fitbit's financial updates can't be ignored, because if the deal falls through that's the Fitbit that investors will be stuck with -- and with no $7.35-a-share exit strategy anywhere to be found.