Facing up all the uncertainties associated with the potential acquisition between GE and Honeywell, Jessica Gallinelli, managing director of Bancroft Capital Management, definitely needs to consider whether and how the future news form Europe would affect the value of her fund’s arbitrage position, what the probability was that booth the DOJ and the Ec would approve the merger, and of course eventually what is the most proper and profitable tactic to take at this certain time.
The strategy of Gallionelli
Gallinelli did the strategy that included buying shares in Honeywell and shorting shares in GE for the purpose of conducting arbitrage. First of all, a well-known direct of indirect by-product of acquisition or merger is the foreseeable or predictable change in stock price. As to the merger’s stock, most or all historical data tells us that a somewhat decrease in the merger’ stock price will highly likely appear right after the relevant announcement of the acquisition. In the meanwhile, the target company’s stock price might experience a surge resulting from announcement. Partially because this generally foreseeable trend of potential change in stock price of either the merger or the targeting company, Gellinelli appeared to be very confident to conduct the profitable tactic by combing the short position in GE with the opposite position in Honeywell. Right till the end of February, it indeed turned out that this strategy taken by Gellinelli did take a great advantage of the estimated resulting change of related stock price. As GRATH 1 shows, the price of GE stock did go down as commonly predicted. In the meanwhile, we did see the apparent and continued increase in the price of Honeywell stock. In short, the investment decision of GEllinelli is mainly due to the objective of using a common sense of resulting outcome in stock price of acquisition and merger.
The reasonable share value range of Honeywell
In order to correctly point out the...