Investment

The Problem

If you tender your Bristol Myers (BMY) stock for Mead Johnson (MJN), you could receive a 5% premium for your shares ($25.74 * 5% = $1.31). Does this mean that if you do not tender you shares, you will lose 5% of your investment? Are you forced to tender?

The Deal

Here is the final deal as announced on 12/15/2009: If you tender BMY shares, you will receive .6313 shares of MJN for each BMY tendered. A maximum of 269M shares of BMY will be exchanged for 170M shares of MJN. Any shares of BMY tendered in excess of 269M will be returned.

The Logic

We postulate that when BMY issues the 170M shares of MJN, the total value of BMY is reduced by the value of the shares MJN shares. In addition, the number of outstanding BMY shares is reduced by 170M / 0.6313 = 269M shares. By definition, the price of a share of BMY is equal to its total value divided by the number of shares outstanding. Here is our calculation of the expected price of BMY (PriceAfter), based on the closing prices of BMY ($25.74) and MJN ($42.85):

From the prices and shares:

ValueBefore = $25.74 * 51,000M = $1,312,740M
ValueAfter = PriceAfter * (51,000 - 269)M
ValueAfter = PriceAfter * 50,731M

ValueBefore - ValueAfter = $1,312,740M - PriceAfter * 50,731M

From the exchange of shares:

ValueBefore - ValueAfter = $42.85 * 170M
ValueBefore - ValueAfter = $7,285M

Combining the 2 calculations above:

But ValueBefore - ValueAfter calculated from the prices and from the exchange of shares, must be the same. Therefore,

$7,285M = $1,312,740M - PriceAfter * 50,731M
PriceAfter * 50,731M = $1,312,740M - $7,284M

PriceAfter = $25.73

Conclusion

So, if you do not tender your shares of BMY for MJN, you can expect your BMY shares to drop by just $0.01. If you do tender them, you could make $25.74 * .05 = $1.31 per share, but that potential profit will be reduced if more than 269M shares of BMY are tendered. If all 51,000M shares of BMY are tendered, you will make just $0.01.

We expect that arbitrageurs will tender many shares, but not all shares will be tendered. Consequently, the profit from tendering will be much less than $1.31 per share, but much more than $.01. If you do not tender your shares, you will probably lose only $.01 per share.

The Post-Mortem

Come back here for the post-mortem. We will let you know how many shares were tendered, and how much you could have made if you tendered.

12-21-2009 Post-Mortem

BMY announced that 500.5M shares were tendered. It will accept 269.3M, or 53.8%. Consequently, if you purchased shares of BMY at $25.74, and tendered all of them, you would receive back the following for each share tendered:

BMY (1.0 - 0.538) = 0.46 shares
MJN 0.538 * 0.6313 = 0.34 shares

If you sold at the open today, you would have received:

BMY $25.89 * 0.46 = $11.91
MJN $41.40 * 0.34 = $14.08

Total = $25.99
Profit before commissions = $25.99 - $24.74 = $0.25

The full was not realized because both stocks dropped between the time the tender ratio (0.6313) was finalized, and the time the percentage of tendered shares which would be accepted was announced. You could have theoretically locked in a profit if you shorted shorted 0.46 shares of BMY, and 0.34 shares of MJN for each share of BMY you tendered. Unfortunately, we had no way of knowing what the ratio would be.

The profit you could have locked in if you knew the exchange ratio, and sold short the appropriate amount of BMY and MJN was:

BMY $25.74 * 0.46 = $11.84
MJN $42.85 * 0.34 = $14.57

Total = $26.41
Profit before commissions = $26.41 - $25.74 = $0.67

YMMV.