It's risk + time value.
Both GOOG and MMI have clauses to opt out of the buyout. Each compnay would have to pay the other a large sum to excercise this right. Then you have potential regulatory issues; the deal could get blocked. I don't think it's likely, but you never know.
The other aspect is time value. If you have $38 tied up in MMI, that max payout you will receive is $40 and nothing more. Using those figures that's roughly a 5.25% gain. But this deal will not get approval for at least 6-8 months and possibly even longer; 12-16 months. During that time your money has the potential to return much more than 5.25%.
Hey, please refer to the 2 following, as a very good indication that the driven down of MMI price is just an outcome of the casino shorter’s (aka scavengers) manipulation:
(1) The stepping down (i.e. aka trailing-edge) saw-tooth shape of the intraday trading (if was really a pure reflection of the deal cancelation risk, it would have been fairly flat around the $38).
(2) Look at http://www.arbitrageview.com/riskarb.htm: the Annualized Yield's (Arbitrage Profit's) are much much lower than 12% (5%), respectively, compared to our MMI case, even though that the Expected Closing Date's on this WEB table are much further than 3 months (referring to April 27, 2011) and the listed merger deals are of much less known companies (i.e. higher cancelation risk) than Google and Motorola.
With the recovery fresh bullish green wind blow (i.e. going down risk fear factor) started this week, next week MMI going to start its correction move up towards the $39 and beyond, where it should really be (i.e. reflecting a nice Arbitrage Profit of 2.5%, or an Annualized Yield of 10.38% for a reasonable expected 3 months closing deal time frame).
Wish you all a nice weekend.
Hey, my 3.81% time value component (would be the clean portion of no risk premium) must be pretty close since I assumed 4 months! I actually didn't know the time first hand, I just thought I saw someone in this thread say 4 months.
Enough BS. There is concern that the deal will fail to be approved by antitrust authorities, or that such approval will take forever and a day. That's it.
I don't share those fears, but I've been wrong before. If you have something intelligent to add, fine, but please stop blathering.
(And google "merger arbitrage" if you want more info on that; there may even be a wikipedia entry that explains it, but the "rule of thumb" is 300 bps over 3 month money for "clean" deals (thats insurance against a MAC and the like); anything above that is insurance against specific risks related to the deal).
Good luck, and have a nice weekend. If you are in the path of that 'cane, as I am, extra good luck.
In addition to the time value of money previously mentioned, you have a few other factors:
1. The justice department anti-trust folks have been fairly aggressive since 2008. There has been some rumblings of anti-trust concerns on this deal. I suspect those will get resolved, but the threat of material divesment of assets and corresponding price adjustments will hang over any deal involving a company as large and dominant as Google.
2. A severe economic contraction can cause parties to reconsider a "done deal". You may want to Google Dow Chemical/Rohm and Hass for a bit of history in that regard. That deal ultimately closed, but not before a lot of court time and a $20 swing in ROH's stock. In that regard, you may want to read the Material Adverse Effect clause in the merger agreement.
I am not saying either of these events will materialize in this case, but with the economy in the dooldrums and the general anti-business tone of the Justice Department, you can certainly see why a 5% premium remains on this deal.
Until the deal closes and Google actually buys all shares at $40, the market still drives the price. Also, until the deal closes $40 is not a 100% guarantee. I believe the current market price includes that risk (about 5%). There are clearly enough folks out there will to take $38 today instead of waiting 4 months to get $40. There are clearly buyers and sellers alike okay with this arrangement.
1. That it won't happen or some delay. Garden variety "a bird in the hand is worth two in the bush" uncertainty.
2. Time value. The stock market, extremely generally speaking, has a required rate of return of around 12%. If this deal takes 4 months, then that would be 3.81% of a time value discount from then to know. As that date approaches, this discount will decrease. The uncertainty discount (1) will also decrease as the deal and details become more and more certain.
What is certain is that $40/37.85-1 = 5.68% (the amount left to earn). The sum of the two premiums I listed = 5.68%. The ambiguity is how much each factor contributes (but does it matter?).
Also, people buy and sell for completely unmarkety reasons (withdrawals/contributions for personal reasons, reweighting a portfolio, etc.), so that moves the price, but usually only in short-term spurts.
In closing, there are actually funds that are designed to take advantage of this time period MMI is in right now. It's usually a predictable return, you're investing in companies that don't really go up and down with the market unless it affects the possibility of the deal. But sometimes, it hits the fan and the deal doesn't happen, hence the reason 1 premium.