Sol Company has announced plans to acquire Luna Corporation by swapping 0.55 shares of Sol stock for each share of Luna stock.After the announcement,Sol traded for $23 per share,and Luna traded for $11 per share.Assuming the takeover is successful,which of the following is the most appropriate merger-arbitrage strategy?

Question

Quizplus · Accepted Answer

The correct strategy is to buy 100 shares of Luna and short sell 55 shares of Sol because for each share of Luna, you get 0.55 shares of Sol. If you buy 100 shares of Luna, you'll effectively control 55 shares of Sol after the merger, so short selling 55 shares of Sol now locks in the price difference.

Sol Company Has Announced Plans to Acquire Luna Corporation by Swapping