Monday, February 22, 2010

UPDATE: SII & SLB - SLB takeover Bid Coming; How Options, Skews React

UPDATE: To read the original post: CLICK HERE.

SII is trading 40.00 up another 2.30 (6.1%) with vol down 3 points. SLB is trading 59.94, down 3.96. The LIVEVOL™ Pro Summaries are below.

So the intimation from SLB was realized this weekend and the standard "sell the acquirer and buy the acquired" was a winner. SII shareholders will receive 0.6966 shares of SLB for each share of SII. The deal is valued at about $11 billion. Click the image below to enlarge.

With SLB trading 59.94 ---> 0.6966*59.94 = 41.75 for each share of SII. So the spread right now (risk premium) is 1.75. As of the close Friday the spread was 1.75 + 2.30 + 3.96 = 7.56; so it has closed substantially on immediate stock moves. Some of the risk premium comes from the news this morning about an investigation into SII board's fulfillment of their fiduciary responsibility - read: "Did they really get enough per share or was there more to be had and they got some sweet deal?"

You can click the News Tab snapshot below to enlarge.

With the deal details out - we can now compare the skew as of Friday to the skew today in SII.

Skew Legend:
Red - Front month
Yellow - Second month
Green - Third month
Blue - Fourth month

We can see a few things:
(1) The differences in the monthly vols have converged other than March (i.e. the lines sit nearly on top of each other).
(2) The upside kink in the front skew has now flattened (literally). This is normal, as the upside was unknown on Friday, now it is "more" known.
(3) The ATM (and near ATM) vols for Mar create a straight line rather than a standard downside smirk.

These are all expected changes in the skew. A few things to watch out for now.
(1) The convergence of SII share price to 0.6966*SLB i.e. convergence means more certainty, divergence means less.
(2) The vols should converge as well. If SII vol starts to diverge from SLB - it will most likely be to the upside indicating uncertainty. You'll see the skew shape change as well if this happens - likely creating a defined shape down if the deal could fall through, or up if a second bidder comes in.

The Options Tab and Charts Tab snapshots are included below for completeness. Click either to enlarge.

This is trade analysis, not a recommendation.

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