3com
Volume in contracts to buy shares of the Marlborough, Massachusetts-based company surged to the highest level since September 2007 before Hewlett-Packard Co. said it would buy the maker of computer-networking equipment for $2.7 billion.
“I dont believe in that much luck,” said Steve Claussen, chief investment strategist at OptionsHouse LLC, the Chicago- based online brokerage unit of options trading firm PEAK6 Investments LP, and a former market maker at the Chicago Board Options Exchange. “If youre on the other side of someone buying calls and a takeover is announced, its like someone held you up at gunpoint. Its like youve been robbed and you feel violated.”
Call options that convey the right to acquire stock for a given price by a certain date usually offer higher returns to traders speculating on takeovers. The U.S. Securities and Exchange Commission polices the options market to ensure investors arent engaging in insider trading.
More than 8,000 3Com calls changed hands yesterday, 17 times the four-week average. The most active were contracts conveying the right to purchase 3Com for $5 through Nov. 20, followed by December $5 calls. The shares rose 5.2 percent, the most since Sept. 28, to $5.68 in Nasdaq Stock Market composite trading prior to the announcement.
$5 Calls
Almost 4,000 of the November $5 calls and 3,300 December $5 calls traded, with almost all of the transactions occurring at noon. That compares with a total of six puts giving the right to sell 3Com shares. Hewlett-Packard, the worlds largest personal- computer maker, agreed to pay $7.90 a share in cash for 3Com, a 39 percent premium to yesterdays closing price.
More than 22 million shares of 3Com changed hands in the stock market yesterday, compared with this years daily average of 4.85 million and the most since March 2008. Trading was heaviest in the hour after 11 a.m. in New York, data compiled by Bloomberg show.
“Somebody knew something was coming,” said Stefen Choy, founder of Livevol Inc., a San Francisco-based provider of options market data and analytics. “It looks like very unusual call buying. I see this very frequently when theres a takeover.”
Calendar Spreads
John Heine, an SEC spokesman, declined to comment about 3Com. Hewlett-Packard declined to comment, spokesman David Shane said. Anastasia Efstratios, a spokeswoman with an outside agency that represents 3Com, didnt immediately respond to a voicemail message seeking comment.
Jon Najarian, co-founder of OptionsMonster Holdings Inc. in Chicago, said the call trades may have been so-called calendar spreads in which an investor sells contracts expiring in one month and buys options with the same strike price further in the future. Claussen agreed that its a possibility. Some types of calendar spreads lose money if a stock gains. 3Com shares rose as much as 36 percent to $7.72 after the announcement.
Goldman Sachs Group Inc. advised 3Com on the transaction, while Morgan Stanley helped Hewlett-Packard, according to data compiled by Bloomberg. Both banks are based in New York. 3Com has its headquarters in Marlborough, Massachusetts, and Hewlett- Packard is based in Palo Alto, California.
Sales of $118 Billion
Chief Executive Officer Mark Hurd is seeking to add to Hewlett-Packards $118 billion in annual sales after the sharpest slump in PC demand in history. The purchase of 3Com increases competition with Cisco Systems Inc., the worlds largest maker of computer-networking equipment, which is also expanding into Hewlett-Packards businesses.
Hurd said in March at an investor conference that Hewlett- Packard will take a “disciplined” approach to takeovers. The company has bought more than 30 companies since he took over as CEO in 2005, according to data compiled by Bloomberg. Hewlett- Packard already expanded its computer-services business last year with the $13.2 billion takeover of Electronic Data Systems.