Hereâ€™s how to make a quick 400% return with minimal risk thanks to the Halliburton / Bakerâ€™s Hughes buyout. Hereâ€™s what youâ€™re going to do:
DO RIGHT NOW
- Buy 100 BHI (Bake Hughes Incorporated) shares, for a total cost of $6,415.
- Sell 112 HAL (Halliburton Company) shares, for a total income of $5,942 right now.
- Wait (total cost right now: $473).
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.
WHEN HAL BUYS BHI
- Your 100 shares of BHI will get purchased.
- You will get 112 shares of HAL, covering your share position
- You will get $19.00 per share of BHI, for a total income of $1,900
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 toÂ lose very little on your 100 shares long BHI. Itâ€™s not like BHI is going to disappear if the deal fails; itâ€™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 BHIâ€™s stock should be much higher. In fact, given the current trades suggested above, one should be convinced investors donâ€™t believe the deal is going to go through, but Iâ€™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 donâ€™t care about since you are getting the same payout, as long as the deal goes through). In fact, analysts donâ€™t even expect Halliburton to have to liquidate that much.
I suppose HAL could reject the deal (BHI shareholders would be crazy to reject it), but keep the big breakup payout in mind. Also keep in mind HAL stands to save $2B per year with that buyout, due to synergy and cost savings, so Iâ€™m not so sure this deal is that horrible for them. The only other fee here is the interest rate youâ€™ll have to pay on the $473 you borrow to get into the trade, but thatâ€™s minimal at best. The deal could go through as early as Q2-Q3, 2015, giving you a 300% return within months. Even if it was postponed to 2016 due to a long antitrust investigation, it would remain an outstanding deal.
This, in my mind, is a major inefficiency in todayâ€™s market, probably caused by everyoneâ€™s hate of oil and oil investments in general. Nothing prevents you from employing the same strategy with 300 shares, 500 shares, 1,000 shares or 10,000+ shares.