Description

Arbitrage - Short divine Inc. (DVIN) and Buy Viant Corp. (VIAN). Divine is attempting to acquire Viant Corp for 4 shares of divine stock for each share of Viant Stock. Viant has agreed to give its shareholders a dividend of $0.48 per share when the merger goes through. Based on the closing prices on 5/3/2002, DVIN = $0.25 and VIAN = $1.35, here is the break down:

Long 1000 shares of VINT = - $1350
Short 4000 shares of DVIN = + $1000
Arbitrage cost = - $350

Cost of VIAN = $1350

After Merger
4000 shares of DVIN = $1000
Viant Dividend = $480


Profit = $130 – 3 trades (assuming $10 a trade)

Return = $100 / $350 = 28.6%

The deal is scheduled to close my late June.

Note that divine is about 2 quarters away from running out of capital. Divine is burning through about 35 million in cash each quarter. Currently they have 80 million in cash on hand as of the end of Q1. divine needs the merger to happen to stay in business. Basically divine is diluting existing shareholders $200 million in equity to get $100 million in cash. Viant is a consulting firm, and it is not profitable. The $100 million in cash will provide divine with the means to stay in business another 3 quarters.

For the Merger happen, the agreement states that DVIN needs $58 million in cash on hand at time of the merger. This means that the acquisition must happen on schedule. divine is employing a temporary payout of 50% for 4 weeks to reduce its burn rate so it can make the $58 million required cash reserve. If the merger does not go through, then divine will run out of cash toward the end of Q4.

Scenario #1

Merger goes through as scheduled.

Net Effect - Make your 28% return for two months via arbitrage.


Scenario #2

Merger does not happen due Viant obtaining a better offer.

Viant shares go up, your long position is now more profitable.

Divine shares should go down because they needed the cash. Your shorts are now more profitable.

Net Effect – Make gains on the both the long and short positions probably in excess of 28%.


Scenario #3

Merger does not go through because of other reasons.

Viant shares will probably stay the same or drop some.

Net Effect – Probably a net wash minus commissions.


Scenario 2 & 3 with Reverse Split

Note that divine has filed for a reverse split that should happen in the next month. The hedge fund managers loaded up on shorts when the filing was announced. After the reverse split divine stock might should continue its falling knife routine but at an accelerated pace.

Catalyst

The Merger must happen in 2 months or less.