FirstEnergy intends to buy Allegheny Energy and the approvals are moving along. Each share of AYE would become 0.667 shares of FE.
When announced in February, AYE increased in price 12% while FE fell 4.5%. AYE then showed a premium of 15% relative to FE, and the premium has steadily fallen to about 1.5% today as the merger looks more certain. The two stocks are now moving in lock step.
1. If the merger falls through, would you expect AYE to fall and FE to rise?
2. Is Arbitrage in play where investors are buying AYE and shorting FE? The NASDAQ website shows considerable short interest in FE.
3. What would you expect if the merger completes? Would there be a lot of short covering in FE resulting in a rise in price?
Thanks any for thoughts.
1. Yes. Mainly due to the unwinding of the arb positions. (currently long AYE, short FE)
2.Yes, that is arbitrage.
3. No. There would not be any short covering. Your positions cancel out based on the exchange ratio announced in the deal. You don't sell you long AYE or cover your short FE.
Hope that helps.