The Curious Investor

Merger Arbitrage Opportunity With Allied and Ares Capital

Einhorn wrote his book in 2002 and since then Allied stock has fallen dramatically. Whether this is a result of the improprieties or simply the result of a credit crisis unseen since the Great Depression, we'll never really know. What we do know is that Ares is getting Allied for a significant discount to book value which has already been written down significantly from the valuation that Einhorn believed was unsustainable. Is this discount enough? Well, Ares conducted months of diligence and thought so and Ares' lenders are willing to extend additional credit so at least some set of sophisticated lenders with close knowledge of Allied's assets continues to believe that the Company supports its current valuation.

Allied Capital Goes from Value Trap to Deep Value

Good catch. I see your point and it is valid. You can get upwards of 7% worth of dividend simply by buying ARCC here. As such, ALD provides just a 1% discount and a whole lot more risk. I think the ultimate thesis that ALD is a much stronger stock as a result of this transaction still holds, but it is not the slam dunk opportunity I thought it was. Thank you for your insight. It's really nice to get constructive comments from the Seeking Alpha community. I'll be sure to post a follow up on my blog.

On Oct 29 11:53 PM BeauZeau wrote:

> Your math is faulty. If you short ARCC and buy ALD as you suggest
> you would have to pay (probably) two dividends to the person your
> shorted ARCC to. That would wipe out any apparent difference in
> the price. The arbs moved in on this as soon as it was announced.
> There is no free lunch here or anywhere else. Both stocks are
> being depressed right now by year end tax lose selling in ALD.
> Just buy ARCC for the least risk here.