A theory about PG

Discussion in 'Stocks' started by thenewguy, Oct 14, 2005.

  1. I have a working theory about mergers I'd like to run by anyone who cares to listen.

    Obviously, PG and G are merging, due to close sometime in Oct (the last time I checked, anyway). The merger is a stock for stock transaction where for every G share you own, you'll get 0.975 PG shares. Obviously as soon as this is announced you get the arb maniacs coming in and sell PG and buy G until the ratio between them = 0.975 + a little bit of fear money knowing that the merger may not go through.

    Then, for the next couple of months, the stocks trade in tandem to each other, and keeping this ratio pretty tight, except that the fear money slowly declines as we get closer to the merger date, because the chance of it bombing out becomes less and less.

    Ok, so none of this is new, and anyone who trades mergers at all knows this stuff, it's all very basic.

    So here's my observations.

    After PG bombs for a while, it bounces around at a depressed price for a couple of months until the merger completion is announced. Usually, right before the merger announcement (they give a guide like "we'll do it at the end of october") the stock seems to get a slew of downgrades. Once the merger is announced often there is a few more downgrades, then suddenly it seems the whole world is on board with the stock. There are upgrades, usually in fast succession, and the price appreciates accordingly. In the past, I've noticed this usually starts about three days past the completion date or so.

    I'm guessing that institutions who have arb'd the merger use the downgrades to cover their shorts and unwind the arb (which by nature has to be pretty massive in size to be profitable), because if you look at PG's chart for the last week or so, you'll see a VERY solid floor there. Usually it tracks the SP fairly well, but during this last tank, it just would not budge. The downgrade last night brought it back to the floor, but not through. Also, at the end of almost every day there is a large amount of block trades, or just flat out size, and on almost every dip.

    Ok, so I know there are holes with this theory, the obvious one being: why would they have to cover their shorts? If they are short PG/long G when the merger goes through, it'll all cancel each other out, no stock movement necessary. The only explanation I can offer is that they are simply trying to make a bigger gain on it by rolling it all into a long position as the merger goes through the completion process.

    Anyone have any thoughts or experience with this?


    - The New Guy
  2. This is what I mean about a "very solid floor"...

    - The New Guy
  3. Guess you haven't checked lately cause G has already merged into PG. ------------ cowpok1027
  4. Wow, that's easily the biggest oversight I've ever had as a trader! If you could see my face right now.....

    Thanks though! You can see the run up before the merger. I played it a bit but if I hadn't missed the announcement I certainly would have been in heavier...

    - The New Guy