Expected return on an effective annualized basis

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On or about November 10, 2019, rumors surfaced KKR would make a $70/share all cash buyout offer for Wallgreens Boots Alliance (ticker symbol: WBA). While WBA shares rose by nearly $2.50 over the following two days from a closing price of $59.24 to $62.72, it fell back a bit thereafter, closing at $62.14/ share on Friday, November 15th. As a merger arbitrageur, you are considering investing in WBA. You expect KKR to make this offer and WBA to accept it; you do not expect there to be an overbid by the likes of Warren Buffett. You do not expect there to be any regulatory hurdles to this transaction, which will allow the transaction to close in six months' time.

a) Assuming you decided to invest in this "arbitrage" opportunity, what would be your "set-up", meaning what would you buy and what would you short?

b) What would be your expected return on an effective annualized basis?

c) As a conservative merger arbitrageur, list two reasons why you might avoid this opportunity at this time?

Reference no: EM132408705

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