Level 3 Shares Pop After Merger

Oct. 6.11 | About: Level 3 (LVLT)

Shortly after receiving regulatory approval, Level 3 Communications (NASDAQ:LVLT) announced the completion of its merger with Global Crossing on Tuesday. While the shares moved higher each day this week the daily volume reached 5-7 times the three month average the past two days. Early this morning, the shares were up almost 20% and are currently up 9%. Why all the excitement?

The approval of the merger wasn't unexpected as both companies have struggled to make money, so the mere announcement that the merger was completed should not have been the reason. Fitch raised its ratings for Level 3 as a result of the merger, citing a reduction in leverage and expected synergies, but I don't think this would cause the large move today.

The excitement may been due to two points made in the Level 3 press release. Level 3 announced that it would be implementing a 1:15 reverse stock split and moving to the NYSE. Certain mutual funds, pension plans and investment pools that are prohibited by their charters from investing in low priced shares will now be able to consider Level 3 as an investment.

Dave Wilson reported on WBBR radio that Level 3 would become part of the MSCI and funds that followed that index would be forced to purchase the shares. All of these factors, combined with a very large short interest in the shares, may have contributed to a short squeeze. According to Yahoo finance, the 290.6 million shares short represented 8.3% of the shares outstanding and 29% of the float.

However, just having a higher share price as a result of a reverse split or moving to the NYSE doesn't make Level 3 a better company or better investment choice. Investors will have to decide if the merger with Global Crossing will result in less cutthroat competition in pricing and allow the merged entity to become profitable. Fitch sees an improved outlook. Now it is up to management to deliver.

Disclosure: I am long LVLT.