Time Warner (TWX) agreed to be bought by AT&T (T). The deal is worth $107.50 – consisting of $53.75 in cash and $53.75 in AT&T stock. The stock portion has collars: TWX shareholders will receive a maximum of 1.437 shares of AT&T, but will not receive less than 1.30 shares of AT&T. Those two limits on the shares are equivalent to AT&T stock prices of $37.411 and $41.349, respectively (Just divide the share limits into the $53.75 stock value to get those prices).
Those who are familiar with our strategies concerning takeover rumors and bids know that we eschew most rumors, preferring instead to concentrate on situations in which either a) the company has announced that it is “exploring strategic alternatives” – effectively putting itself up for sale – or b) has a bid in hand, but the stock is trading higher than the bid – indicating that perhaps a higher bid is forthcoming from another party. We have written about this approach in several feature articles in the past.
The rumor mill is running overtime lately, with takeover talk on the upswing in the markets. Most rumors don't lead to signed and sealed deals, and actual transactions aren't much discussed in advance. But mere talk about deals can lead to heavy and potentially profitable option activity, especially as one can attain a large amount of leverage if there is a big jump in a stock's price.
