OSIP - Takeover Trading Above Hostile Bid

Discussion in 'Trading' started by livevol_ophir, Mar 1, 2010.

  1. livevol_ophir

    livevol_ophir ET Sponsor

    Details, charts, prices, options here:

    OSIP is trading 56.44 up 52.5% with IV30™ down 11% on takeover news. Note the takeover bid is for just $52.

    The news is an unsolicted bid (hostile) from Astellas Pharma for $52 in cash. Astella says that no financing is required and they will begin their tender offer to shareholders on 3/2 (tomorrow).

    So the question - why is OSIP trading so far over the bid price? Here's some back story to help with that:

    (1) Astellas said that it first approached OSI about a possible takeover in January 2009 but that OSI "has refused to engage in a meaningful discussion."

    (2) OSIP stock traded as high as $53 in late 2008. The Charts Tab snapshot is included (in the article).

    Note that the bottom portion of the chart are the vols: IV30™ (red) vs. HV20™ (blue). The yellow shaded area charts the vol difference.

    Both of these factors allow for the possibility of a rejected tender and a subsequent higher bid. Of course they also allow for the deal to fall apart.

    The way we look at things on the floor is almost always through the ATM straddles. The Options Tab snap is included (in the article).

    A few things to note (remember, the bid is $52).
    (1) The March 55 straddle is 2.75 x 3.45 with ~$3 fair value. Hypothetically a sale of that straddle at fair value would lead to break even if the stock closes at $52 or $58.

    (2) Apr and Jul 55 straddles are ~$4.00 and $6.00 fair value. Someone could sell the Jul straddle, collect $6 - be safe if the stock goes all the way to $49 or up to $61. I'm not saying this is a good sale - I'm saying it's just fair value at this point - which is pretty remarkable considering this is an all cash, no financing needed bid that's a ~50% premium to the close on Friday.

    (3) The downside puts in Apr are still trading at reasonably high vol - the Apr 45 puts are 43 vol on a dime wide market in a stock that traded ATM vol of ~ 30 prior to the news. The possibility of a higher bid also means the possibility of the buyer walking away in frustration.

    (4) 60 level calls are bid everywhere; in March they are 0.20 x 0.45. That means the probability measure (outcomes and probabilities) allow for bids above 60 with a reasonably high probability (i.e. non trivial).

    This is trade analysis, not a recommendation.

    Details, charts, prices, options here: