Spread on Guidant-J&J Deal Looks Pretty Rich

With Johnson & Johnson(JNJ Quote) finally agreeing to revised terms with Guidant(GDT Quote), 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. ...