- Published: September 1, 2022
- Updated: September 1, 2022
- Language: English
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Introduction Facing up all the uncertainties associated with the potential acquisition between GE and Honeywell, Jessica Gallinelli, managing director of Bancroft Capital Management, definitely needs to consider whether and how the future news form Europe would affect the value of her fund’s arbitrage position, what the probability was that booth the DOJ and the Ec would approve the merger, and of course eventually what is the most proper and profitable tactic to take at this certain time. The strategy of GallionelliGallinelli did the strategy that included buying shares in Honeywell and shorting shares in GE for the purpose of conducting arbitrage.
First of all, a well-known direct of indirect by-product of acquisition or merger is the foreseeable or predictable change in stock price. As to the merger’s stock, most or all historical data tells us that a somewhat decrease in the merger’ stock price will highly likely appear right after the relevant announcement of the acquisition. In the meanwhile, the target company’s stock price might experience a surge resulting from announcement. Partially because this generally foreseeable trend of potential change in stock price of either the merger or the targeting company, Gellinelli appeared to be very confident to conduct the profitable tactic by combing the short position in GE with the opposite position in Honeywell.
Right till the end of February, it indeed turned out that this strategy taken by Gellinelli did take a great advantage of the estimated resulting change of related stock price. As GRATH 1 shows, the price of GE stock did go down as commonly predicted. In the meanwhile, we did see the apparent and continued increase in the price of Honeywell stock. In short, the investment decision of GEllinelli is mainly due to the objective of using a common sense of resulting outcome in stock price of acquisition and merger.
The reasonable share value range of Honeywell In order to correctly point out the reasonable share value, I am using two methods to compare and contrast, as following: Method one: binominal tree There are several significantly basic assumptions of the binominal tree approach. Assumption and Analysis: 1) The percentage range of the possibility of EC’s approval is from 50% to 80%. Since the EC began reviewing mergers in 1990, it only blocked one of more than 400 of those proposed by American companies. With this certain information, we are able to promisingly foresee the approval will highly likely happen in the end. (2) In the situation where the merger will be approved, the probability that Honeywell’s stock price will surge with EC’s announcement is between 65% and 90%. Considering the all uncertainties in the real market I decide such a comparatively broad range.
3) In the other situation where the rejection of this merger will be proved, the probability that Honeywell’s stock price will decline with EC’s announcement is between 80% and 90%. At this point, my concerns associated with this range-decision include the fact that after a previous merger of Honeywell and AlliedSignal, Honeywell board members did not think the company could make significant improvement for another 18 months to two years. Additionally, some critical comparison showed in the EXHIBIT 4 tells that a bunch of financial data of Honeywell is lower that the counterpart Median numbers of the whole industry.
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