The notion that regulatory concerns might hamper

America Online's


acquisition of

Time Warner


made for a lot of ink in the papers Tuesday, but takeover traders were acting like it was yesterday's news.

See also

Block Talk No Worry for AOL, Time Warner

Shares of both companies slid Tuesday on reports the

Federal Trade Commission

would impose considerable conditions on the impending merger. The terms of the deal, announced back in January, call for Time Warner shareholders to receive 1.5 AOL shares for each Time Warner share they own. As with most impending mergers, shares of Time Warner, the acquiree, are trading at a discount to the deal's value: At their current level, they trade at 5% below the takeout price. Shares of Time Warner closed down $2.59, or 3.1%, to $81.78 Tuesday, while shares of America Online closed down 56 cents, or 1%, to $57.19.

Risk arbitragers seek to profit from the spread between the acquirer's shares and those of the company to be acquired. An arbitrager who thinks a deal will go through will often buy the takeover candidate while shorting the acquiring company, seeking to profit on this spread. In the case of the AOL/Time Warner deal, you might buy 100 shares of Time Warner and short 150 shares of AOL. If the deal goes through, the spread would shrink to zero, and you would profit.

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Playing the Spread
Tracking AOL, Time Warner shares

Source: BigCharts

The spread widened a bit Tuesday on reports of the FTC's concerns, said one arb, "because they are maybe getting spooked by this. I think the chances are the deal gets done in the end, but the fact is this is pretty bad news. You can't assume this is just nothing."

The arb had no position on the merger because the spread has been too tight. At one point in the spring it even went negative -- one share of Time Warner was worth


than 1.5 shares of AOL. The arb also said he has stayed away from this one because the FTC chairman, Robert Pitofsky, "is dangerous. You don't know what he's going to do."


It's possible that the slight widening of the spread may generate some interest, said Tom Burnett, president of

Merger Insight

, a firm that advises clients on arbitrage situations.

"For a while, it was trading at too narrow a spread," he said. "Now it's beginning to be more attractive."

Burnett also reckons the deal will go through. "The companies are going to have to make some compromises," he said. "We don't see any reason for them to avoid making those compromises."

Despite the slight widening of the spread, however, the arb still isn't biting.

"The spread has not reacted that strongly," he explained. "It's not trading like a spread where people are scared."