Dow Dupont and the new Dow

The last time we had a stock that had a merger become part of the equation it was pretty easy to make heads and tails out of the situation.

That was for General Electric and Wabtech.

This time around, it’s not as simple.

Even the names are confusing and somewhere down the line it may get even more confusing as we approach the end point of the original merger between Dow Chemical and DuPont.

When those two first merged, part of the understanding, in order to get regulatory approval for the merger of those two behemoths was that the new entity, Dow Dupont, would break up.

Merge and then break up.

The break up, though was to be into 3 separate companies.

What we just witnessed this week was the first step of that break up into two companies.

So if you owned Dow DuPont, you now own both Dow DuPont and (the new) Dow.

The formula is pretty simple.

If you owned 100 shares of Dow DuPont, you now own 100 shares of Dow DuPont (at a much lower price) and 33 shares of (the new) Dow, plus you received cash for the equivalent of 0.3333 shares of (the new) Dow.

Simple, right?

So, at Dow DuPont’s closing on Monday, ahead of the spin off, those shares were trading at $54.42.

Shares of (the new) Dow, from this point on referred to simply as “Dow,” were priced at $53.50.

That means shareholders should also have received $17.83 in cash regardless of the number of shares of Dow Du Pont that they owned.

If you had 100 shares of Dow DuPont, you woke up this morning to 33 shares of Dow and 100 shares of Dow DuPont, plus that cash.

If you had 1000 shares of Dow DuPont, you now have 1000 shares of a cheaper  Dow DuPont, 330 shares of Dow and the same $17.83 in cash.

The shares of Dow Du Pont, though, were adjusted downward to reflect the new shares of Dow and the cash.

Each one of those shares went from the previous closing of $54.42 to $36.59, representing a downward adjustment of $17.83 per share.

Here’s the math in a nutshell:

100 shares of old Dow Du Pont  was worth $5,442.00

100 shares of new Dow DuPont was worth $3,659.00

33 shares of Dow was worth $1,765.50

Put those two together and you have $5,424.50

Add to that $17.83 and you have $5,442.33

Now comes the complicated part.

The options are still priced the same.

For LEAPto Profit subscribers, that means your January 2020 $65 options are still January 2020 $65 options.

The difference is all in the deliverable.

That means that if Dow DuPont goes beyond $65 in the sum of its aggregate parts, you will be assigned.

What are the sum of its aggregate parts, you ask?

Dow DuPont, Dow and the cash.

For each contract of Dow Du Pont you are short, you have to look at the price of Dow Du Pont and add to that approximately 1/3 the price of Dow shares.

At today’s mid-day price, that would mean $37.63 for Dow Du Pont and $18.91 (one third of $56.73)

If you really want precision, it would be the price of Dow Du Pont plus the price of Dow divided by 3.3 plus $0.1783

It may get more confusing when the next spin off happens.

That means that if you have more than 100 shares of Dow after this spin off you may want to think twice about selling options on them too cheaply, because you would in essence be putting yourself on the line doubly in the event the underlying Dow DuPont got called away from you and if the Dow contracts were also at risk of their own assignment.

In essence, it would be like being short Dow shares.

So beware.




Views: 45