Law of unintended consequences: short edition

LLOY has bid for HBOS at the rate of 0.85 LLOY for 1 HBOS, so with LLOY at 251.5 currently, the offer is worth 213.8p Now due to the fear of a run on HBOS, the govt has granted LLOY an exemption to competition rules and have waved it through. There is no regulatory risk in this deal. So where does HBOS trade? 178p - nearly a 17% discount to the offer terms. So why isn’t this being arbed away? Because we can’t short LLOY, so there’s no point buying HBOS. So the weak institution is being pushed down, down, LIBOR is still at stressed levels, so HBOS is more and more vulnerable. The price keeps getting pounded (by long investors selling - there’s no shorting of course!), and the tether that should exist between their share prices, the rescue line that should be saving HBOS’s share price isn’t there. So the chances of a real run on HBOS are increased as the price plummets. Congratulations go to G Brown (who claimed credit for the ban on Sunday) and the independent FSA (who instituted the ban).

I guess the question is why isn’t the merger arb market efficient for current owners of LLOY? That is, if the deal is 100% certain to go through (or close) why shouldn’t current LLOY shareholders be selling their LLOY shares and buying HBOS. In the US, it would be taxes, but don’t know about Brit tax law.

Tax would be a consideration for individual holders of the stock, but not for any fund managers. And I don’t think that many individual LLOY holders would be sitting on a capital gain - I don’t have prices for earlier than 1996, but LLOY is at its low since then. So that leaves indexed investors who probably can’t sell that much of LLOY to buy HBOS. It’s a false market.

So you’re saying that the only significant shareholders of LLOY are indexed investors? That’s not good…

Hmm. Talk is now centering around the 75% approval required by HBOS shareholders. Zero regulator risk, but apparently there’s still some residual shareholder-suicide risk.