This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

Spread on Guidant-J&J Deal Looks Pretty Rich

With Johnson & Johnson (JNJ - Get Report) finally agreeing to revised terms with Guidant (GDT), merger arbitragers who are still willing to go long Guidant get paid a lot for their risk, say hedge fund managers.

"The spreads are enormously high, considering that the deal is in much better shape," says Jeffrey Cohen, founder of Saddle Brook, N.J.-based merger arbitrage hedge fund Silverado Capital Management. Cohen is involved in the trade, short Johnson & Johnson and long Guidant with a combination of stocks and calls.

Merger arbitragers generate returns in a merger by buying the stock of the target company and sometimes selling short the stock of the acquirer. The bet is that the merger target's shares will rise to the takeout price while the acquirer's shares will decline as it swallows a smaller rival.

If the deal fails to happen, arbitragers lose money. The time to the deal's completion and the probability that it will occur are two important variables used to estimate the rate of return in this trade. Generally speaking, the more likely a deal becomes, the narrower the spread between the target's stock price and the offer.

At the close of trading Tuesday, Guidant shares were trading about $2.67, or 4.4%, below the implied price of J&J's bid, which is a mix of cash and stock. That return, which translates to almost 34% on an annualized basis (assuming the deal closes in early January), is sweet for a deal like this one.

"It's unusually high by any standard. A 33% return without any use of leverage is unheard of, unless you perceive risk," says one arbitrage hedge fund manager.

Not everyone agrees that the trade is a free lunch. After all, following a series of regulatory setbacks at Guidant, J&J walked away from its old bid of $25.4 billion in stock and cash.

1 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Try it NOW
Only $9.95
Try it NOW
14-Days Free
Try it NOW

Check Out Our Best Services for Investors

Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
Try it NOW
Try it NOW
Try it NOW
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
SYM TRADE IT LAST %CHG
JNJ $101.74 1.40%
AAPL $126.35 2.50%
FB $83.18 -0.14%
GOOG $551.83 0.64%
TSLA $194.50 5.10%

Markets

DOW 17,976.31 +263.65 1.49%
S&P 500 2,086.24 +25.22 1.22%
NASDAQ 4,947.4410 +56.2220 1.15%

Partners Compare Online Brokers

Free Reports

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs