So, You Wanna Be An Arb?

This is the second page of Luskin's column on the JDS Uniphase/SDL deal. To return to part one, click here.

Now, What Can Go Wrong

But there's a kicker that makes the estimate of the worst-case scenario slightly optimistic: A tidy little $1 billion break-up fee payable by SDL to JDS Uniphase, if SDL walks away from the deal and merges with someone else. That's about 13 points per share of SDL. But it's not payable if the deal busts for antitrust reasons, so let's bake only half of that into our estimate of the no-deal spread, which makes it about 152 3/4.

That means if you do the trade today at an arb spread of 82 7/8, and then the deal comes undone and the spread moves to 152 3/4, you'll be unwinding the trade at a loss of about 69 7/8. ...