Risk Arbitrage: Anatomy of the J&J-Centocor Deal

With Centocor's (CNTO Quote) acquisition by Johnson & Johnson (JNJ Quote) just days away from closing, you would reasonably expect Centocor's shares to be trading just a few pennies below the takeover price. According to the announcement of the deal July 21, J&J agreed to pay $61 per share in its stock for Centocor. So why is Centocor available for purchase at 59 11/16, a $1.31 discount to the stated $61 deal price? (Note that all prices are as of Friday's close.)

The answer is that the pricing period is working against the interests of Centocor's holders.

Many stock-for-stock mergers are structured to provide a fixed value for the target's stock -- in other words, a set per-share value for the deal. This contrasts with the Microsoft (MSFT Quote) acquisition of Visio (VSIO Quote), where the exchange ratio is fixed, and the per-share value is left to fluctuate. ...