AT&T to buy Time Warner, opportunity for "Merger Arbitrage" strategy?

I’m a Level 1 candidate, and just read over hedge fund strategies… would this AT&T buyout be an opportunity for the merger arbitrage strategy if you missed out on buying shares for time warner (ticker: TWX)?

TWX has jumped in the past two day on rumors of the buyout, and today the news was out, $107.50/share (crazy huh), Monday morning, the stock is going to hit this price… so would it be a good idea to short ATT?

The idea is that you would short ATT and go long TWX. That’s what makes it arbitrage-y. And basically you should be able to squeeze some juice out of the trade still even if it is post announcement (since the strategy does not depend on insider knowledge, but rather the tendency of buyers to overpay for acquisitions, or just capturing he control premium, depending on your point of view).

How to balance the long against the short seems tricky to me now, or maybe it’s just been ages since I’ve boned up on this stuff. If the prices are supposed to converge, you presumably want equal dollar amounts to be long and short, but if you’re trying to keep the trade market neutral (which is the main reason you call it arbitrage), then you want to match the exposures by the ratio of the betas.

Anyone remember this balancing act? It may be that the betas converge as the deal goes to fruition, so that dollar neutral and beta neutral end up being more or less the same thing.

In any case, the arbitrage goes bad if the deal falls through, and it’s also possible that deploying that much capital has a better return elsewhere.

bchad boned lol


BTW did you read the “footnotes” of the deal? ATT will pay TWX 500m if regulator blocks the deal.

For instance, if Trump is elected you can forget about this deal. In essence ATT bought a call option on Hillary election…

The obvious risk here is, you know like, the deal could break off and stuff, like Allergan/Pfeizer.

Big chance this gets stopped, I assume market will price that into the stocks though so your risk reward will be adjusted for that. Would be all about position sizing and making sure you arent on the hook too much if the trade goes the wrong way.

Did admin work for a merger arb fund and the legal bills they racked up were insane. I am sure a huge merger like this is going to be a windfall for legal firms

The WSJ had an article earlier this week on the lack of arb in this deal, as well as follow up story yesterday about the continuing value in TWX–share price hasn’t moved towards the buyout price at all. Long TWX is the play here.

BTW, most stuff on merger arb I’ve run across says “don’t try this at home.” Most merger arb funds have fleets of lawyers analyzing the deal to figure out the myriad ways that the deals can go wrong.

That’s not to say that you can’t try, but it seems to be a lot more complex than simple pairs trading.

+1 to bchad. A law degree is much more useful than a CFA or finance degree if you want to run a merger arb strategy.

As to M3A what happens if the deal gets blocked and you are long TWX? Youll get hammered, too much risk.

goldman urging apple to bid

Trump will cancel this deal. He said so in a few speeches.

If you are wondering whether AT&T’s dividends are sustainable, don’t worry. In 2015, the company declared $1.89 of dividends per share while earning $2.37 per share. So AT&T was paying out less than 80% of what it made, which leaves a sizable margin for safety.

Direct TV Now will also boost business for ATT now.