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On February 1st, 2016 Heinz Baking Company (HNZ) announced that they were going to be acquired by Best Foods, Inc. (BFI) in a stock swap transaction. Specifically, each share of Heinz Baking Company would be exchanged for 1.62 shares in Best Foods. At the close of trading on the announcement date, HNZ was trading at $37.62 per share, and BFI was priced at $24.48 per share. Best Foods stock does not currently pay a dividend.

a- At announcement, what was the arbitrage spread?

b- If you want to undertake the typical M&A arbitrage strategy and buy a parcel of 3 million shares in HNZ, what trade would you make in the stock of BFI?

c- What would your dollar profit on the announcement date be from the trade described in b. above?

d- Sixty days after announcement, the stock price of BFI has risen 4%, but the price of stock in HNZ is unchanged from where it closed at announcement. What is the arbitrage spread at this time?

Financial Management, Finance

  • Category:- Financial Management
  • Reference No.:- M92857063

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