Value Investors Club / HUDSON CITY BANCORP INC (HCBK)

So rich with insights and it exposed me to the massive gap of knowledge that I have. I'm nowhere close to knowing how to do a basic pitch let alone one that's worthy of VIC. The structure of this pitch is the gold standard: 1) Description - They say in a few sentences what this stock is and what the trade is 2) Brief history - In a few sentences, the history of the trade 3) Arb opportunity - They tell us what the arb spread is. Don't waste time in showing how to calculate the arb spread, everyone knows that 4) Qualitative thesis ('Probability of approval') - What motivates the trade, i.e. why the analyst believes the deal will get through 5) Deal break valuation - The meat of the pitch. The analyst demonstrates mathematically that the deal break values of HCBK and MTB are respectively higher and lower than consensus. Variant perception! 6) Catalyst - Nuff said. The deal itself. Key concepts learned: - Arb spread: the price difference between 2 related assets available to arb. In this context (merger arb), it'd be the price difference between the current price of the acquiree stock and the adjusted price (i.e. the forecasted price if the merger goes through). 1) Calculate implied value per share. Offer terms: HCBK shareholders get 0.084 MTB shares per 1 HCBK share Implied value per share: MTB stock price * 0.084 2) Calculate gross arb spread: Implied value per share - Current HCBK stock price 3) Calculate net arb spread: Adjust for: i) Cost of borrowing the stock ii) Dividends (when you short a stock, you must PAY the dividend to the lender) Remaining questions left: - I'm unsure why the analyst went through so much effort to demonstrate that HCBK is highly over-capitalized before and after a balance sheet restructuring. A bank that is over-capitalized beyond what is necessary is putting profitability on the table. Ceteris paribus, showing that a bank is highly over-capitalized doesn't seem like a plus point to me. - The analyst noted that since $3+ of excess capital per share and they aren't required to generate $0.62 of annual pro forma earnings, he then viewed it as incremental to HCBK's earnings-based valuation and thus added $3 to his valuation. So... to generalize, when I'm valuing a bank stock, I can just add the excess capital per share to my pro forma valuation???