To The Moon

Hey Tigers, hope you have a good weekend.

I read the article about acquisitions trading opportunities yesterday from @OptionsDelta. I have the same ideas. I think trading for acquisitions is nice and stable in this volatile year.

According to my experience, the market price will be between 80% and 95% of the offer price before the deal officially done. It provides us the trading opportunities. But the biggest risk is the failure of the acquisition, so we need to evaluate the possibility of failure according to each case.

I am grateful @OptionsDelta for sorting out all the specific deals that have been issued with acquisition offers. Refer to:Acquisition arbitrage opportunities in 2022

I want to brief what I traded and why.

​$Activision Blizzard(ATVI)$​

I talked about ATVI many times, which is consistent with @OptionsDelta. The deal's offering price is $95, which is nearly 22% away from the current price. I buy the shares from $80 through exercise of Sell Put.

However there are many controversies about this deal. Buffett bought more ATVI shares after the deal came out, that shows he has great confidence in Microsoft. Buffett and Bill Gates are very good friends, and the largest position of Bill Gates' fund is Berkshire shares. I believe Buffett's judgment on this case will be more accurate, because of his information advantage.

ATVI is the largest acquisition in Microsoft's history. Microsoft has not been radical. I believe that it announced this deal, it has already passed a very comprehensive evaluation and think it would be done.

At present, I hold some ATVI shares with a cost of $80, which is a floating loss on book, but I Sell Covered Call, that I don't actually lose money. And I Sell Put with an exercise price of $77, which expires this week. If It is not exercised, I will continue Sell PUT due on June 17th or July 1st.​$VMware(VMW)$

Next is VMware. Broadcom bought VMware at a price of $61 billion equivalent to $142.5 per share, and the current price is already $131, which shows that the market is very confident about this deal.

In the semiconductor,$Broadcom(AVGO)$ has always been known as a merger maniac, but it is not the previous Broadcom. The current ticker of Broadcom is AVGO, which comes from Singapore's semiconductor company - Avago. While the original Broadcom code is BRCM, which is gone. In 2015, Hock Tan, CEO of Avago, merged Broadcom with amazing financial leverage, that transformed Avago into the fifth largest semiconductor company in the world, and the case became the most famous merger in semiconductor history. It left the company names of Broadcom and ticker of AVGO.

To the consternation of the tech industry and Wall Street, Broadcom almost acquired $Qualcomm(QCOM)$ in 2017. Broadcom planned to acquire Qualcomm for more than 130 billion US dollars, which would change the whole semiconductor industry. However, this case was rejected by Trump administration due to national security issues in 2018, and Broadcom withdrew its acquisition, which was the only unsuccessful case for Hock Tan.

If you are interested in AVGO merger story, you can read more from search. Obviously, the scale of VMware is not as good as Qualcomm's, there is no national security problem, there is lots of difference between software and hardware, and no anti-monopoly problem, so the market is quite confident to the deal.

From the perspective of VMware, VMware has changed owners many times since 2000. In 2003, VMware was acquired by EMC for $635 million. Then it sold to Dell for $67 billion in 2015. With the decline of Dell's main business, it was rumored that Dell would sell VMware for cash as early as two years ago.

In 2021, Pat Gelsinger, the old CEO of VMware, left VMware, he returned to Intel as CEO. The departure of the top ten CEOs in Silicon Valley can be said to accelerate the selling of VMware. Later, VMware had no a competent CEO, and its main voting are controlled by the founder of Dell. At the press conference, Dell seemed to facilitate the transaction very much, so Wall Street judged that the transaction might be reached faster.

According to my opinion, the stock price will between 80% and 95% of the purchase price, which corresponds to VMW's stock price of $114-135. Because VMware's share price rose too much on the news release day, the premium of Sell Put at $115 was too low, so I didn't do it. Instead, I chose Sell Call at $140. The risk is that if this deal closes quickly and the stock price rises above $140 very soon, I have to exercise to short VMW at a price of $140. I judge that the deal at least take 4-6 months, so if the stock price remains at a high level around $130, I will Sell Call of $140 for several months in a row.

If the stock price falls back to less than $125 as the market moves, then I will Sell Put between $115 and $120.​

About$Twitter(TWTR)$, I don't have any position now. If I want to trade at the current price, I will choose Sell Put of $35-38. I wrote down my ideas before, If you are interested, you can see The most certain option opportunity of the year！

The article reminds me to notice$Alleghany(Y)$.  It is less than 2% discount from the current price of $835 to the purchase price of $848.02, means that the confidence of the market in Buffett. Because the discount is too small, there are few trading opportunities.

Looking at the option chain, it is quite effective to Sell Call due in July. The way to arbitrage is to Sell Call at the exercise price of $850, which is higher than the purchase price, so it is very stable to arbitrage. But the trading volume is low and the bid and ask price gap is relatively large. The $7 show on the price are not real, and the last trading was about $5. I expect that if more than $3 I will do it.​Is Sell Call at $850 still risky? The risk comes from price hikes, if Buffett raises the purchase price, the stock price may soon rise above $850. But my judgment is that Berkshire has already paid a premium of 30% for this acquisition. Buffett explained at the shareholders' meeting that $11.6 billion is the price I am willing to pay. So I don't think he will raise the price any more.

Is Sell Call $840 reliable? I think short-term is OK, and there are certain risk. According to Berkshire's plan, this case is completed in Q4 this year. Before it complete, the stock price should not reach $840, which is equivalent to time discount. This is unrealistic from any deal in history.

Ok, this is all my sharing, hoping to help everyone.