Why Gemstar Shares Are Tumbling Ahead of Merger Vote Tomorrow

Gemstar-TV Guide (GMST) shares are down sharply this morning ahead of the company’s shareholder meeting tomorrow to vote on the company’s proposed merger into Macrovision (MVSN).

Back in December, the two companies agreed to a deal in which Macrovision will acquire GMST for $6.35 a share in cash, or 0.2548 of a share of Macrovision. The company will pay up to $1.55 billion in cash, and the rest in stock.

Now, here’s what I know. Based on the original formula, $1.55 billion in cash covers 244 million shares. That leaves another 185 million shares of GMST to be exchanged in stock. Macrovision shares today are trading at about $15.66. Multiply that by 0.2548 and you get $3.99 a share. If you do the math, then, the real value of GMST shares should be someplace in between those two numbers. I calculate the price at $5.41; last week the stock closed at $5.15.

So here is the strange part: What is going on today? GMST is down 99 cents, or 19.2%, to $4.16 a share. Why is that happening? Is there a perception the deal is in trouble? Is there something in the terms of the deal I’m not getting?

Reader John Chisholm solves the issue; as he notes, any new buyers of the stock can no longer choose to receive cash, and instead will receive all stock for their shares. Thanks for clearing things up, John!