The recently announced merger between ExxonMobil
ExxonMobil and XTO Energy announced that the boards of both companies had agreed to an all-stock transaction with ExxonMobil issuing 0.7098 shares for each share of XTO.
Deals involving stock usually set up a possible arbitrage trade as one stock trades at a discount to the other. For example, Exxon's 16 Dec close of $68.43 values XTO at $48.57, but XTO closed at $47, a 3.2% discount. An arbitrage trader might consider the following:
- Sell short 7098 shares of XOM for $485,716
- Buy 10000 shares of XTO for $470,000
The trade nets nearly $16,000 before expenses. When and if the deal goes through, the long and short stock positions cancel out.
That if is very important. Just prior to the deal announcement, XTO was trading at about $41.50. If something happens to derail the deal, the price is likely to fall back to that level, leaving our trading friend with a sizeable loss.
The trader also needs to consider dividends. The deal is expected to close in the second quarter of 2010. XTO is scheduled to go ex-dividend in late December. Exxon hasn't announced its next dividend, but should go ex-dividend sometime in early or mid-February -- our trader will collect the XTO dividend but need to pay the Exxon dividend on the short position.
These trades typically aren't practical for individual investors. In the quantities most individuals could trade, commissions would eat up most of the profits, offering little reward for taking on the risk of the deal falling apart.
However, for an investor interested in purchasing ExxonMobil, it may be worth watching the discount and considering XTO instead. At the acquisition ratio, 50 shares of ExxonMobil are equivalent to a little over 70 shares of XTO.
|
Stock |
Share Price |
Number of Shares |
Total |
|---|---|---|---|
|
ExxonMobil |
$68.43 |
50 |
$3,421.50 |
|
XTO |
$47.00 |
71 |
$3,337.00 |
Source: Yahoo! Finance as of Dec. 16, 2009.
When and if the deal closes, the 71 shares of XTO get swapped for 50 shares of ExxonMobil plus a little cash to buy out the fractional share. The buyer would also collect the XTO dividend in January but would miss out on Exxon's juicier payout.
The cheaper buy-in price isn't free, there is some risk in using XTO as a proxy to buy Exxon stock. Possible outcomes include:
- The acquisition goes through as announced; everybody's happy.
- Something happens to cancel the deal, and XTO falls back to pre-deal prices.
- Something turns up that gives Exxon cause to lower the terms of the deal.
- Another company bids more for XTO (very unlikely).
Some other deals offering similar opportunities include the combined cash and stock Baker Hughes
With the spread only a little over 3%, there isn't much reason for an investor to take the risk of using XTO as a substitute for ExxonMobil. But that spread will fluctuate with the market and someone who's willing to take a little risk may just grab ExxonMobil at a discounted price.
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