What will happen to Cairn Stocks i possess, post Cairn-Vedanta merger?
Merger arbitrage, or risk arbitrage as it is sometimes referred, is a strategy that
attempts to capture a spread between the price at which a company (target) trades
after a transaction is announced, and the price at which an acquiring company
(the acquirer) has announced it will pay for that target firm upon closing of a
transaction (at a date in the future). The spread between these two prices exists
due to the uncertainty that the transaction will close on the same economic terms.
For successful transactions, the spread narrows to virtually zero by the transaction
closing date.
What will happen to the FUTURES of CAIRN?
how they are settled?
NSE showing some open Interest.
see, in merger
the one company should be the dominant company and the other should be the subdominant one.
in this case,the vedanta is dominant one and the cairn is sub dominant one.
the merger will be like this that the share owner of cairn will be given 104 shares of vedanta for the 100 shares of cairn he holds. and the price difference between the two companies should be near zero.
the person who wants to take the advantage of merger arbitrage has to buy 100 shares of cairn and short 104 shares of vedanta. then on the deal closing date, he should exchange the 100 shares of cairn he bought with the 104 shares of vedanta. and then the exchanged shares of vedanta has to be used to buy back the shorted shares of vedanta.
What will happen to the FUTURES of CAIRN?
in this case, coming to your question, the vedanta shares should see a slight downfall and the cairn shares should rise but on the deal closing date, the price difference between them will be near zero. you should take this with the pinch of salt.
how they are settled?
the answer to this question is in the above paragraph.
and for your info, if this would be the case of acquisition and not merger, then
the target company (cairn in this case) shares should rise and the
acquiring company (vedanta in this case) shares will fall to some extent.
can read the warren buffett and the art of stock arbitrage book for more detailed info.
the information given here is for as investment advice only, first before investing, please take a informed decision.
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