Look at this article http://biz.yahoo.com/rf/010222/n22631768.html VSH is bidding $28.82/shr cash for SILI, and it already owns 80% of the common shares. As of this writing, SILI is trading at over $30. (Up from $25 since this announcement) How is this possible? Why are traders willing to pay $2 more than the price VSH is bidding for the company? I saw this same situation a few months ago, where some company was bidding $13 for MAIR, and it traded at $13.50 afterwards.
The risk-arbs cause this. I worked with the head trader of a risk-arb firm once and he explained it to me once but I found this article which would do a much better job of explaining it http://www.thestreet.com/comment/cfeatures/790399.html A risk arb in a stock exchange deal is easier to understand. I'm still trying to figure out how an arb works with a cash deal.
Thanks, but your artice explains why the current price might be less, not more, than the takeover price. Plus, your article gave an example of a stock-for-stock merger, not a cash buyout. Still makes no sense.
Maybe I read it wrong but I thought that the Centocor/J&J deal was a cash deal and the final price was based on whatever was in the merger agreement. But you're correct, according to the article even in this type of cash tender scenario it's unlikely that the stock price will close above the takeover price. But your question does make me curious too. I found this article on the Fool regarding a takeover by Bauch&Lomb in May. Maybe a similar thing is happening with Siliconix. http://www.fool.com/news/foolplate/2000/foolplate000509.htm I guess that if investors feel that the company is worth more than the takeover price, they will bid up the stock. It doesn't sound like arbs have anything to do with it. Does anyone here do any risk arbitraging? Is it a valid trading strategy for individual trader?