WPP announced Sept. 13 it would buy Grey in a deal initially valued at $1,005 per share, half in cash and half in WPP stock. The number of WPP shares offered in the exchange is fixed, so Grey investors won't know the final value of the deal until the day it closes in December or January.
WPP's stock has edged up since mid-September, increasing the value of its offer as of Oct. 22 to about $1,034 a share, according to Advertising Age's analysis. WPP's offer, initially worth about $1.52 billion, last week had a value of $1.56 billion.
The share price of Grey, the No. 7 agency holding company, has increased in recent weeks, reflecting that its worth will be linked to WPP stock until the deal closes. But as is typical in stock deals, Grey sells at a discount to the value of the offer.
Last week, you could buy Grey for about $1,020 a share-about $14 less than the value of WPP's offer. That difference is arbitrage profit-the potential profit available to traders willing to take on the risk that WPP's stock may fall or that the deal could fall apart.
The reward: If WPP stock is higher when the deal closes than it was before the announcement, Grey traders will profit. That's what's happened so far.
Investors are evaluating the risk. Grey's largest shareholder, Chicago money manager Ariel Capital Management, last month unloaded its entire 25.8% stake in the high $900s (AA, Oct. 11). Ariel made a huge profit since it bought in below $400 a share in 1999, but it still left millions on the table.
Timothy Fidler, Ariel's senior VP-director of research, said WPP's gains over the past month are a sign that investors view the Grey deal positively. Still, he said, Ariel has no regrets about selling when it did. "There's no point in taking on a bunch of risk-that the deal falls through or that WPP stock falls-to squeeze out the last few dollars" per share, he said.
Grey investors who are hanging in have seen the value of the deal rise over the past month. But for Grey holders who have no intention of keeping WPP stock, the risks are real that the deal could be worth less the day it closes than it's worth today.
Traders might do well to recall True North Communications. Interpublic Group of Cos.-after getting spurned when it made overtures to Grey-struck an all-stock deal with True North in March 2001. From announcement day to the closing three months later, the value of the deal fell by more than $400 million, or 20%.
The players are different this time. But risk remains: Waiting for the last dollar can lead to profit-or loss.