Problems with Cash-cum-Stock Offer

There are innumerable evidence about the negative returns to the bidder post-announcement of an acquisition. This makes any cash-cum-stock offer an interesting exercise.

Look at the Kraft Foods' bid for Cadbury. Krafts' price fell by 5.9% yesterday (day 1 in event study parlance) after the announcement of the takeover bid. The bid is a 60% stock and 40% cash bid. Just assume that there is no synergy in the merger. Then the price of Kraft will fall to reflect any takeover premium. But this simultaneously reduces the blended offer value for Cadbury.

The current stock prices of Kraft and Cadbury present an interesting case study in risky merger arbitrage that the arbs used to do during the 1980s and early 1990s. Cadbury's price is above the blended offer price (computed after the price of Kraft declined) and the I Bankers of Kraft are confident that no White Knight is going to come to the rescue of Cadbury.

If this is correct, a risky arbitrage strategy would be to go long on Kraft and short on Cadbury. But as I said, it is risky arbitrage. :)