Hbs About Cc Company Essay

660 Words3 Pages
Introduction

Strategic Capital Management, LLC is a hedge fund planning to make financial investments in Creative Computers and Ubid. Creative Computers sold approximately 20% of its Internet auction subsidiary, Ubid, to the public at $15 per share. Ubid's stock price closed the first day of trading at $48, giving Ubid a $439 million market capitalization. On dec 9, Creative Computers had a market capitalization of $ 232 million (22.75 * 10,238,703 outstanding shares) whereas Ubid’s market capitalization amounts to $439 million. This indicates that Ubid currently has a greater market value than the parent company. Moreover, the mispricing can be taken advantage of through an arbitrage opportunity. Paradoxically, the parent's stock price
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In addition, the rate of return since Dec 9 1998, after CC distributed 7.32 million UBID shares to its shareholder, is 5.72% calculated as following:

Transaction | At 9th December 1998 | At 7th June 1999 | Long Creactive computers | $22.75 | $32.63 | Short Ubid 0.71469 shares at $35.6875 | -$25.51 | -$34 | Cash proceed from Ubid | $25.51 | $25.51 | Initial margin 50% on long position | -$11.38 | -$11.38 | Initial margin 50% on short position | $12.75 | $12.75 | Net equity | $24.13 | $25.51 | Rate of return | | 5.72% |

Before CC distributed 7.32 million UBID shares to its shareholder, the arbitrage opportunity exists. The rate of return is 11.42% which is discussed before.
The difference between the two rates of return is caused by the arbitrage opportunity with which one can purchase shares in CC and hold them until CC Shares get converted into Ubid Shares. In the case of an arbitrage transaction (Discussed under section 3.1), the investors are able to convert the asset purchased on margin (i.e. CC shares) into Ubid shares and those converted shares would be used to pay the borrowed Ubid share under the short selling contract. The consequence of such transaction is that the balance of asset purchased on margin and balance of short sale assets (i.e Ubid shares) are both closed off after the repayment of short sale asset, giving rise to a net amount of zero. By contrast, there would be $32.625 worth of asset purchased on

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