I am not going to go into detail about the Puget Sound Energy deal, it has been covered in depth in many other places which I will list at the end of this post.
But I wanted to bring it up because it was my first taste of risk arbitrage. I started my initial position in PSD (PSE’s ticker symbol is PSD, confusing) around a month ago. The deal gives all share holders $30 a share cash in exchange for their shares. So the idea is quite simple buy it for less than $30, the deal goes through you get your cash and profit. The reason merger deals are called “risk” arbitrage is well… because there is risk. In true arbitrage you have two simultaneous markets with different prices and you have essentially a risk free profit.
The risk is that the deal had to be approved by the Washington UTC and this had not happened a month ago. In fact it just happened this week. In addition some of the communities in WA are not in favor of the merger hence there was risk that this could prevent the UTC from approving it.
On the downside if the deal did not get approved I was quite content with holding the stock and collecting dividends in the event that I could not sell it for a profit in the short term. For someone who might not want their money tied up in the long term, the downside is different.
Interestingly enough with news of the approval the stock traded Wednesday below the sale price so there was still an option to make a quick very low risk profit. It will be interesting to see if it continiues to trade at this price tomorrow on Friday.
Mucho thanks to the Old School Value Blog for consistently posting updates on this deal.
PSD Merger at OldSchoolValue
Puget Sound Energy Website