By: Mario Carias, CFA
As most of us have heard, Lam Research (LRCX $39.48) is buying out Novellus Systems (NVLS $34.70) in a friendly merger of two technology companies looking to consolidate and reduce costs. It’s a 100% share deal, for every 1 share of NVLS the shareholder gets 1.125 shares of LRCX. The deal is expected to close in 2Q2012.
For those that have been in NVLS patiently for the last couple of years the premium as of the close of last night was 28%. For those getting involved this morning you need to know how to calculate the spread involved in the transaction. In a full share swap M&A deal you would expect the shares of the acquiring company to drop and the shares of the acquired company to rise. The spread is what allow for the uncertainty of the deal not going through as well as the cost of carrying the trade before the deal closes. In this case the initial indication is that the deal will go through by the 2Q2012, or about 6 months.
The arbitrage hedge funds, will short 125 shares of LRCX for every 100 shares of NVLS they buy in order to lock in the spread. Currently, pre-market, the spread has been around 1.60%-2.00% -- as long as this spread covers the cost of the trade, the arbitrage funds will take the trade. Especially since interest rates are so low and there are few low risk 6-month instruments yielding 3.50% (annualize the 1.75% 6-month yield). The fact that the spread is very low indicates that the street is expecting the deal to go through as planned.
Not the most exciting of M&A deals, but you can learn to track it relatively easy on a spread sheet. Take the current price of LRCX, multiply by 1.125, and that will give you the theoretical price of NVLS. The current pre-market spread is 1.64%, annualized to 3.3%.
*DISCLOSURES: No relevant position
