How to make over 300% return with minimal risk (HAL-BHI)

Here’s how to make a quick 400% return with minimal risk thanks to the Halliburton / Baker’s Hughes buyout. Here’s what you’re going to do:

When Halliburton buys BHI, you will get 1.12 shares of HAL for every share of BHI you have. You will also get $19.00 in cash.

Thus, you are making a profit of $1,900-$473=$1,427, an over 300% return with minimal risk.

Note that it does not matter what happens to the prices of BHI and HAL. Whether their stock prices go up or down, you are getting the same payout anyway; even if HAL was to shoot up to 100 and BHI to come crashing down (or the opposite), you are still getting your short and long positions covered by the buyout.

The only real risk is the deal not going through. But even if the deal fails, HAL will have to pay BHI a $3.5B fee, roughly 8.5% of its current capitalization. And BHI will remain a profitable, well-managed and very competent company, in a winning and growing sector (oil). Also, I do believe the deal has very good chance to go through (>90%) and even if it does not, you stand to lose very little on your 100 shares long BHI. It’s not like BHI is going to disappear if the deal fails; it’s a good oil company that has been in business for a very long time and has done fairly well. You could lose a little from your short HAL shares, but generally this sector tends to move together (all shares in the oil industry either go up or down together), so your loss is limited even in the unlikely scenario the deal does not go through.

Clearlt, The Street clearly disagrees with me and thinks this deal is not going to happen, because BHI’s stock should be much higher. In fact, given the current trades suggested above, one should be convinced investors don’t believe the deal is going to go through, but I’m not so sure about that. The only problem could be antitrust regulations, but HAL already consented to liquidate up to $7.5B of assets if needed (which, again, given the current trade, you don’t care about since you are getting the same payout, as long as the deal goes through). In fact, analysts don’t even expect Halliburton to have to liquidate that much.

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