To The Moon

If you don't know what easy money can be made in today's market, read this article.

First, what's happening in the stock market right now:

The end of the epidemic in China on May 31 is good news for the world economy, both in terms of supply chains and consumption. Stocks rebounded sharply for three days. But President Joe Biden will meet With Federal Reserve Chairman Jerome Powell on May 31 to discuss "the state of the U.S. and global economy" against the backdrop of higher inflation. It will be the first meeting between Biden and Powell since November.

The talks come as expectations of a rate rise have cooled. And the timing of the talks in early June reminds me of the unpleasant market moves of early April and May.

Add to that a volatile situation in the Asia-Pacific region and a growing inflation problem in Europe. Bother is the best summary of the stock market this year. Therefore, I would like to sort out a relatively certain acquisition arbitrage opportunity and gradually earn the time value of options.

5 companies in the acquisition process

1. $Activision Blizzard(ATVI)$

What happened: Microsoft held a press conference on January 18 to announce that it would buy Activision Blizzard for $95 a share in an all-cash deal valued at $68.7 billion, including Activision blizzard's net cash. The deal represents a premium of about 45 percent and a stake value of about $74 billion, according to Bloomberg calculations. Bobby Kotick will continue as CEO of Activision Blizzard. Once the deal closes, the Activision Blizzard business will report to Phil Spencer, Chief executive officer of Microsoft Games. The transaction is expected to close in fiscal year 2023.

Purchase price: $95 per share

Analysis: Blizzard shares traded at $78 as of the closing date, a 21% increase from the purchase price. This is the market's pricing of risk: first, the SEC questioned the disclosure of acquisition information and some people engaged in insider trading, among which the most innocent is buffett who bought Blizzard in the first quarter. The second is an antitrust investigation by the Federal Trade Commission (FTC) because of complaints from groups that threaten data privacy and security, consumer rights and employee wages.

Some analysts see antitrust fears as a result of a lack of familiarity with the video game industry. Blizzard doesn't have any creativity or competitiveness, it's just a factory machine that has squeezed its IP to the limit. It's better to sell it at a good price early. I think the probability of completion of this acquisition is very high, the price fluctuation reference range of $75 ~ $82.

How to trade: Consider doing a monthly sell put to profit from the time value. A put with a $75 strike price due June 17 would yield about 8% annualized. Or you can sell the at-the-money option put, and if it's exercised, keep doing the sell call covered strategy.

2. $VMware(VMW)$

What happened: On May 27, chip giant Broadcom (AVGO) said it would buy cloud provider and virtual machine software giant VMW (VMW) for $61 billion in cash or stock, while assuming about $8 billion of VMW's net debt. Under the acquisition plan, Vmware shareholders will have the option to sell their shares in cash at $142.50 per share or to exchange them for Broadcom common stock at a ratio of 1:0.252.

Purchase price: $142.50 / share or 1:0.252 for Broadcom common stock

Analysis: as of the day of writing, VMW's share price was $129, 10% away from the purchase price, indicating that the market has great confidence in the acquisition. There was no antitrust opinion, no media opinion that a deal could not be reached, no news of a potential rival takeover. So this deal has a good chance of going through. The stock is expected to fluctuate between $111 and $129 before the acquisition is completed.

How to trade: Consider doing a monthly sell put to profit from the time value. Put, with a strike price of 120 due June 17, for example, had an annualized return of about 5.9%. Or you can sell the at-the-money option put, and if it's exercised, keep doing the sell call covered strategy.

3, $Alleghany(Y)$

What happened: On March 21, Warren Buffett's Berkshire Hathaway said it agreed to buy insurer Alleghany for $11.6 billion, or $848.02 a share, in cash. Berkshire hathaway said the deal price "represents 1.26 times Alleghany's book value on December 31, 2021" and represents a 16 per cent premium to Alleghany's average share price over the past 30 days. The deal is expected to close in the fourth quarter of this year.

Purchase price: $848.02 / share

Analysis: As of the day of writing, Alleghany's stock price was 832.93 dollars, just 2 percent below the purchase price. That suggests the market sees no difficulty in closing the deal.

How to trade: Above 848, you can sell calls.

4. $Silicon Motion Technology(SIMO)$

What happened: On May 5, MaxLinear and Huirong reached a definitive agreement in which MaxLinear will acquire Huirong in a cash and stock deal that gives the combined company an enterprise value of $8 billion. Under the merger, Hueyon technology will receive $93.54 in cash for each American depositary share (ADS), or four common shares of the company, and 0.388 common shares of MaxLinear at a consideration of $114.34 per ADS (based on MaxLinear's closing price on May 4, 2022). Combined revenues are expected to exceed $2bn a year. The transaction is not subject to any financing conditions and is expected to close in the first half of 2023.

Acquisition price: $93.54 in cash and 0.388 common shares of MaxLinear, or about $114 per share

Analysis: As of the day of writing, the stock price of Huirong Technology was 90 dollars, which is about 20 percent below the purchase price (108.58). I think it shows that the market is wary of small cap acquisitions in a volatile market. The two companies have similar market capitalisations, each around $3 billion, which is not comparable to those of the previous giant acquisitions. But it also saves the trouble of antitrust review and has a high probability of completion of the acquisition. The share price is expected to fluctuate between $87 and $92.

How to trade: Consider doing a monthly sell put to profit from the time value. Put, with a strike price of 85 due June 17, for example, has an annualized return of about 26%. The risk premium is high. Selling at-the-money options is not recommended. If the stock is exercised and bought, keep doing the sell Call covered strategy.

5, $Twitter(TWTR)$

What happened: At one point on April 14, Twitter was up 15% in premarket trading; Tesla CEO Elon Musk announced that he will buy Twitter for $54.20 a share in cash. After a brief back-and-forth between the two sides, Twitter's board announced on April 25 that it had reached a definitive agreement in which musk's wholly-owned entity would buy Twitter for $54.20 per share in cash, valuing the company at about $44 billion. Musk has secured $25.5 billion in debt and margin loan financing commitments and will provide about $21 billion in equity financing commitments, Twitter's board said. Twitter's board said the deal has been unanimously approved by its board members and is expected to close this year.

According to public information, the acquisition funds come from three sources, two from financial institutions such as $Morgan Stanley (MS), worth about $13 billion and $12.5 billion, and the third is Musk's own equity, estimated to be about $21 billion. The high price foreshadows takeover risks.

On April 29, an SEC filing revealed that Elon Musk sold 3.15 million shares of Tesla (worth about $2.8 billion) on April 26. On April 25, the day before the sale, Musk announced a $44 billion acquisition of Twitter, of which $21 billion would be personally financed. Tesla shares have fallen more than 12% in the past three days, wiping $120 billion off its market value, amid fears that Musk could dump the company's shares to use for acquisitions. Musk responded by saying he has no plans to sell further Tesla shares after those stock sales.

On May 12, when Twitter fell 18%, Musk tweeted: "Twitter trading is on hold pending details to support calculations that spam/fake accounts really make up less than 5% of users." The media interpreted the move as Musk's intention to buy Twitter at a reduced price. Then on May 17, Musk said again that a viable deal at a lower price was not "out of the question," and Twitter's shares plunged 8%

Acquisition price: $54.20 / share is uncertain

Analysis: For Musk's price behavior, some analysts interpret it as a means to give up the acquisition. I don't quite agree with that judgment. Mr Musk, who has become an Internet sensation, is sure to buy Twitter and make it his own platform. But we also have to consider whether Musk will give up if the market conditions are really bad. Judging by his previous behavior, Musk is more inclined to delay or even push prices down when the market is bad.

I'm less worried about bad financing than I am about the SEC getting involved, and that's what's likely to kill the deal.

Twitter shares are now back at their pre-offer price of $39, a key support level. In the general rebound of the market, no particular positive factors can be seen in the stock price, just ordinary level fluctuations, indicating that the market is no longer taking the acquisition seriously.

How to trade: Use a sell put as a potential acquisition stock because it has fallen back to its pre-acquisition price.

Potential takeover rumors

$Electronic Arts(EA)$ seeks to be acquired

What happened: On May 23, media outlets revealed that game development giant ELECTRONIC Arts has held talks with "a number of potential sellers" this year, including Apple, Disney and Amazon. Apple and the other companies declined to comment. The status of the talks is unknown, but Apple does have an interest in games due to its Apple Arcade service.

EA approached Disney in March to establish a "more meaningful relationship" than a licensing deal, but Disney decided not to pursue an acquisition. EA also had talks with NBCUniversal and was close to a deal, but those talks broke up over differences over pricing and structure.

Analysis: Given the state of the gaming market and EA's market capitalization and fundamentals, it's highly likely that EA will indeed be looking to be acquired. Also of note was a large option order on May 24 with a turnover of $3.05 million$EA 20220916 150.0 CALL$. Suggest as a lottery ticket.