MSc in Banking and International Finance

Course:

Finance and Investment (XXX)

Professor: XXX

Case Study

General Electric's Proposed

Acquisition of Honeywell

Presentation date: 20th November 2015

Submission date: 18th December 2015
 General Electric's proposed acquisition of Honeywell

Executive Summary

This paper examines the failed merger transaction of General Electrics and Honeywell in the
year 2001. In October 2000, GE agreed to acquire Honeywell for $45 billion, where
Honeywells shareowners will receive 1.055 shares of GE stock for one share of Honeywell.
Nevertheless on March 01, 2001 the European Commission announced to review the
transaction in further extent after the US regulators already approved it. Four months later, they
prohibited the merger due to reduced competition in the aerospace industry, which will result
in higher costs for end consumers. The methodology of this paper is mainly based on literary
research and articles from the Anglo-Saxon area as well as the Harvard case study. It also
includes opinions from experts from the banking and finance industry, in particular from the
Hedge Fund, M&A and Sales & Trading area.

One of the key findings of this paper is that with a merger arbitrage strategy on GE &
Honeywell, it is possible to outperform the market by betting on a diminishing spread between
both stocks. Gallinellis equally short position in GE and long position in Honeywell provides
a return on investment around 34%. Nevertheless there are also challenges to overcome such
as a limited trading volume as those trades involves often a high leverage to generate a risk-
adjusted return. Further to this, the arbitrage spread is acting as an indicator of the possibility
that GE-Honeywell merger goes through. The higher the arbitrage spread, the less the
possibility is. The arbitrage spread experienced a downward trend after the announcement of
this merger. However, 5 days before European Commission formally announced to stringently
investigate this case, the arbitrage spread started to rise significantly.

Additionally, this paper also analyses the projected synergy. The consolidated firm is expected
to gain market power among overlapped products. The deal can also expand the customer base
for both two firms as they can provide bundle offering for complement products. In addition,
synergy can arise from cost savings and improved overall efficiency in operations. GEs former
CEO and chairman, John F. Welchs understanding of GE and the industry helped the firm to
achieve a well-diversified portfolio and become an industry leader.

We adjusted few ratio projections, such as revenue growth rate and dividend payout ratio as
well as correct inappropriate calculations in our discounted cash flow model. We provide
justifications for key assumptions as well as the sources for data inputs. The share price the
adjusted model is estimated to be $34.44 per share, $2.32 higher than the original estimation.
Moreover, we also analysed Honeywells value with the multiple method, arriving at the
conclusion that the GEs bid price ($48.67) is fairly priced, compared to its peers equity value
per share with a maximum of $50.75. We could evaluate Honeywells with-synergy value
using comparable transactions stock premium. The difference between the percentage of stock
premium prior to one month or week to the last day was significant higher than the respective
of the comparable transactions. Therefore, synergys added value to Honeywell can be
displayed in its stocks performance which presents better results to the dates close to the
announcement date.

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 General Electric's proposed acquisition of Honeywell

Table of Contents

1. Investment Strategy ............................................................................................................ 4

2. Discounted Cash Flow Valuation ....................................................................................... 6
3. Relative Valuation .............................................................................................................. 7
4. Potential Merger Synergy ................................................................................................... 8
5. Return on Gallinellis position - Early closing position ..................................................... 9
6. Arbitrage Spread ............................................................................................................... 10
7. Investment Decision ......................................................................................................... 12
8. Conclusion ........................................................................................................................ 12
9. Bibliography ..................................................................................................................... 13
10. Appendix .......................................................................................................................... 16

Figures

Figure 1: Arbitrage Spread and Discount .................................................................................. 5

Figure 2: Performance Comparison ......................................................................................... 16

Tables

Table 1: Numerical Example of Return on Equity .................................................................... 5

Table 2: Original vs Adjusted DCF-model ................................................................................ 7
Table 3: Return on Investment on arbitrage position............................................................... 10
Table 4: Stand alone value and Probability ............................................................................. 11
Table 5: Calculations on both positions in Honeywell and GE ............................................... 16
Table 6: Dividend payout ratio over time ................................................................................ 16
Table 7: Multiple transaction methods - original ..................................................................... 17
Table 8: Multiple transaction methods - redifined ................................................................... 17
Table 9: Multiple transaction methods - result ........................................................................ 17
Table 10:Adjusted Stand alone valueation Honeywell ............................................................ 18
Table 11: Stand alone value and Probability (extended) ......................................................... 19

Equations

Equation 1 ................................................................................................................................ 11
Equation 2 ................................................................................................................................ 11
Equation 3 ................................................................................................................................ 11

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 General Electric's proposed acquisition of Honeywell

1. Investment Strategy

First of all, the main question Jessica Gallinelli has to answer, is what will be the impact on the
absolute and relative difference between the share prices of both companies, also called spread.
In other words, what will be the effect on the stock prices of General Electric (GE) and
Honeywell International Inc. on the latest news of the European Commission. In general, she
is running a market neutral strategy and thus, there are four possibilities: close, reduce, hold or
increase both positions at the same time. In addition she also have to think about how fast the
market will respond to the press release from European Commission antitrust chief Monti
(Schuetz, 2000) as both shares are listed on the US stock market.

One of the key consideration Gallinelli has to think about is what will be the impact on GEs
and Honeywells stock valuation. As John F. Welch Jr., CEO of GE at that time, said after the
merger announcement in October 2000, he expects the deal to be completed by early next year
(Sorkin and Deutsch, 2000). However, as a result of the announcement of EU commissioner
Monti to review the transaction, the merger will not be completed in the first few months of
2001, but rather in the third or fourth quarter 2001. This will not only increase the administrative
merger costs for both parties, but also decrease the likelihood that the deal will be accepted
without any operational merger restrictions. This means that the projected synergies and cost
reductions of total up to 15bn USD by end of 2002 (Sorkin, 2000), which are a substantial part
of Honeywells valuation, cannot entirely taken into account anymore. Therefore the latest news
will result in a widen spread as the probability of the transaction decreases and the uncertainty
for the shareholders increases (ICIS Chemical Business, 2001).

Moreover, another key consideration for her is how to deal with the size of her positions, which
are 1.25% resp. 0.10% of the outstanding shares of Honeywell resp. GE as of March 1, 2001
(Bloomberg, 2015). This is especially crucial when she is going to fully close or substantially
reduce her positions in one or both companies, which will be very difficult due to limited daily
trading volume. More specific, based on data from Bloomberg, the daily average volume in
Honeywell stocks over a 100-day period is 5.96 million respective for GE 18.66 million shares.
As a result, according to Lange (2015), the maximal percentage in a US blue-chip company,
which can be traded without moving stock prices in an unfavourable direction, is around 5%
per trading day. As such, Jessica Gallinelli can only trade 3.0% (299,000 stocks) of her holding
in Honeywell and 9.3% (933,000 stocks) in GE. Therefore, it takes over 11 trading days for GE
and 34 days for Honeywell to fully close both positions and thus it is not possible to react in a
reasonable period of time on the latest news by only trading shares. All calculations are shown
in Table 5 in the appendix.

Additionally, Gallinelli has only a few hours left before the US stock pre-market will open,
particularly the regular market with high trading volume (NASDAQ, 2015). The news start to
make the round in Brussels around 12pm GMT on March 1, 2001 followed by the first report
on Bloomberg from Associated Press (2001) at 2:07 pm GMT. In order to react properly on the
latest news, without selling a substantial part of her positions on the market, which would lead
to highly adverse price movements, there are two more appropriate possibilities: either she
writes (sell) put and/or buys call options on GE and writes call and/or buys put options on
Honeywell. With such a strategy, she will be able to hedge her holdings against unfavourable
stock movements (widen spread) while profit from an additional leverage.

The main reason why Gallinelli does have nearly equally weighted positions in GE and
Honeywell, is a classical arbitrage strategy to explore short-term price differences between

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 General Electric's proposed acquisition of Honeywell

those two stocks, whereas the stock of Honeywell is following GE with a fixed exchange rate
of 1.055. This strategy is also called merger arbitrage or risk arbitrage, whereas the trader is
betting on decreasing spread between two merging companies (CMC Markets, 2015).
According to Seeking Alpha (2012), [...] it involves identifying target companies that are [...]
bought out by another company, but whose prices have not quite appreciated to the takeover
price. As you can see below in the chart, before March 1, 2001, the spread between the stock
price of GE and the bid price from GE (GE x 1.055) was between $1 and $4 (average $2.4),
which represent a discount rate of about 2% to 8% (average 5.2%). The trend of the spread,
however, is clearly shrinking over time, before end of February 2001 rumours start to circulate
on the stock market about the review through the EU
(Colle, 2015).

Figure 1: Arbitrage Spread and Discount

Therefore as an arbitrageur, Gallinelli is betting that over time, the price of Honeywells stock
will be the same as the takeover value proposed by GE (spread = 0), which means that there
will not be any arbitrage possibilities anymore. There might be also the chance that other
competitors start to bid for Honeywell, which will result in a rising share prices for Honeywell
and falling GE-stocks as they would have to pay more for the acquisition. Moreover, Jessica
Gallinelli is also following a market neutral strategy with having both short and long positions.
When comparing it to the S&P 500 Index, being long on Honeywell and short on GE, both
positions equally weighted (in theory) performed clearly better and beat the index by 9.37%
over a 87-period, as shown in Figure 2 in the appendix.

Below are five numerical examples, which support her strategy (fees, transaction costs, interest
expenses are excluded and total margin of 100% on the short position according to Aebersold
(2015)).
General Electric Honeywell Total Portfolio Total Liabilities Total Equity
in thousands
absolute relative absolute relative absolute relative absolute relative absolute relative
March 01, 2001 416,000 49.87% 418,200 50.13% 834,200 100.00% 583,940 70.00% 250,260 30.00%
Bullish Market Scenario
(GE & HON +10% ) 374,400 44.87% 460,020 55.13% 834,420 100.03% 583,940 69.98% 250,480 30.02%
Bearish Market Scenario
(GE & HON -10% ) 457,600 54.87% 376,380 45.13% 833,980 99.97% 583,940 70.02% 250,040 29.98%
Worst case Scenario
(GE +10% & HON -10% ) 374,400 49.87% 376,380 50.13% 750,780 90.00% 583,940 77.78% 166,840 22.22%
Best case Scenario
(GE -10% & HON +10% ) 457,600 49.87% 460,020 50.13% 917,620 110.00% 583,940 63.64% 333,680 36.36%
Realistic Scenario
(HON = GE x 1.055) 416,000 48.66% 438,880 51.34% 854,880 102.48% 583,940 68.31% 270,940 31.69%
Table 1: Numerical Example of Return on Equity

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 General Electric's proposed acquisition of Honeywell

As this table above shows, the investment strategy of Gallinelli is a merger arbitrage, whereas
she bets on shrinking spread between the proposed bid price of GE and the actual share price
of Honeywell. In the most. In the most realistic scenario, Honeywell will trade 1.055 times the
share of GE which means that her short position in GE did not generate any profit or loss but
the long position in Honeywell increased by 4.95% or $20.7 million. Therefore her market
neutral strategy performed on Investment (ROI) 2.48% and due to the leverage of 2.33 on
Equity (ROE) in total 8.26%. Of special note is that either both stocks are rising or falling, her
equity value stays nearly the same, which shows her market neutral strategy.

2. Discounted Cash Flow Valuation

This section will review the discounted cash flow (DCF) model, its estimations and forecasts.
The main assumptions are that Honeywell will continue its steady operation over the next few
years and major cost items experience no significant change. We found a number of major
misstatements in the model which distorts the final results.

The model starts with a 5-year revenue forecast. Expenses in the income statement and balance
sheet items are tied to the revenue, as their balances are expressed as a percentage ratio of total
revenue. One can argue the 6% revenue growth for the next four years may seem to be over
optimistic as the past 3 years average is merely 3.6%. However, this argument fails to include
the unrealised effect of the merger between Honeywell and AlliedSignal and Honeywell and
GE. Indeed the revenue growth was 0.8% in 1999, but it may because, during that year, the
firm spent most of the time and effort in completing the merger with AlliedSignal. During 2000,
the next financial year, the firm was back on track of strong revenue growth (5.4%). The
revenue forecast then takes into account of the potential synergy between Honeywell and
AlliedSignal and cautiously generates a mid-term forecast. On the other hand, a 6% revenue
growth forecast does not overestimate the synergy either because the revenue can also be
stimulated by the synergy from the merger with GE. In a longer term, the firms growth is in
line with the overall economy. Therefore, we use the US GDP growth rate for 2000, 4.1%
according to World Bank (2011), as the perpetual revenue growth rate. This also affects the
calculation for terminal value using constant growth model.

Two items are not in line with the revenue growth - rate of borrowing and dividend payout
ratio. The interest rate of firms borrowings in the model uses 10-Year A-rating bond rate as
proxy. According to a number of rating action reports (e.g. Moodys, 1998 and Moodys, 1999),
Honeywell has maintained a firm credit rating at A2. Honeywell is assumed to remain its
healthy debt structure and steady revenue growth. Therefore, we do not expect any negative
inputs on the credit rating. The merger with GE, on the other hand, will have positive effect on
Honeywells credit outlook as GEs support will become a significant rating factor. After the
merger completion, Honeywell would be able to raise finance from the debt market at a cheaper
price as GEs rating was Aaa at that time. Therefore, we set the interest rate at 6%, considering
the US Corporate Bonds yields for Aaa and A are 5.8% and 6.3%, respectively.

The dividend payout ratio projection also needs adjustment. The model averages the dividend
payout ratio from 1997-2000 and assumes the firm would maintain the average rate. According
to Table 6 in the appendix, during the past 9 years between 1992 and 2000, the average dividend
payout ratio is merely 27%. Only in 1999 and 2000, Honeywell paid dividend at a rate above
30%. Consider companies rarely cut their dividend due to the asymmetric market reaction to a
decrease in dividend, Honeywell is more likely to payout dividends at a rate that can sustain.
Therefore, we adjust the forecasted payout ratio 2% down for each of the following years. The

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 General Electric's proposed acquisition of Honeywell

discussion now turns to the discount rate estimation. The estimation for cost of debt, as
discussed earlier, is decreased to 6% as the expectation of Honeywell receiving a higher credit
rating after its merger with GE.

The model uses capital asset pricing model (CAPM) to determine the cost of equity. The
calculation of debt and equity value in the model is incorrect. The adjusted ratio takes into
consideration of the market value of Honeywells debt and share value. We also disagree with
decision of considering the risk free rate in line with 30-year US Treasury Bond. According to
Koller et al. (2010), the estimates may be misleading as the result is distorted by the illiquidity
of 30-year Treasury. As a result, we take the 10-year US bond yield as the proxy for risk free
rate since the bond itself can better match the cash flow stream that we evaluate. We use the
historical US stock premium as proxy for risk premium. Our estimate for cost of equity has
gone up slightly to 10.39%, compared with 12.49% stated in the original model.

The table below summarises all the adjustments and calculates the correct share price estimate.
The fair value of Honeywell is estimated as $34.44 per share, with synergy. This is slightly
higher than the close price before the merger announcement ($32.34).

Adjusted
Original DCF Notes
Model
Long-term growth rate 5.27% 4.10% World Banks data
Interest rate 7.8% 6.0% Improved rating
Dividend 30.5% -33.1% 28.5% - 31.1% Each year down by 2%
D/E ratio 25:75 12:88 Correct calculation of wD&wE
CAPM
Risk-free rate 5.29% 4.87% 10-year T-Bill
Risk Premium 6% 4.6% Historial US stock premium
Cost of Debt 7.8% 6.0% Improved rating
Cost of Equity 12.49% 10.39% Cost of Equity part of CAPM
Net Debt Calculation 5,251 4,427 Use current years balance
Share Price Projection $36.72 $34.44 Up by $2.32 (-6.3%)
Table 2: Original vs Adjusted DCF-model

3. Relative Valuation

In the third section, we will use a different method to value Honeywell. For the estimation of
Honeywells stand-alone value, multiple transaction method will be used. In the multiple
transaction method all the firms selected should be comparable. In our case, we were given the
financial data, such as EBIT, EBITDA, Sales and Net Income, of six comparable to Honeywell
firms. These companies are Emerson Electric, Textron, Tyco International, United
Technologies (UT), General Electrics and Honeywell.

In our view not all given firms are appropriate for estimating the Honeywells stand-alone value.
To begin with, Tyco International. that operates in a different industry, as it is a security
services company, while other peer are specialised in the aerospace industry. What is more,
GE is excluded from the analysis as on one hand it is directly involved in the transaction and,
on the other hand, the firm is significantly larger than the given peer firms. Moreover, we
decided to exclude Honeywell from our valuation as we want to calculate its value in

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 General Electric's proposed acquisition of Honeywell

comparison to the defined peergroup. We evaluate Honeywells stand-alone value according

to the three remaining firms (Emerson Electric, Textron, UT) using the Enterprise Value as
multiple of Sales, EBIT, EBITDA and Net Income (Table 7 in the appendix).

Firstly, we have to recalculate EBIT and EBITDA as the case studys exhibit uses equity value
as the denominator instead of enterprise value. As a consequence, it changes the estimates for
multiples and the results are stated in Table 8 in the appendix. The adjusted peergroup can be
found in the appendix (Table 9) including the refined multiples. According to Table 8, there
are differences between the given peergroup and the refined one. The most significant
differences are between Sales and EBIT, which changed from 60,400 to 36,198 and from
63,227 to 49,097 respectively. The refined values after the recalculations are more reliable as
an indicator of Honeywells value and show us a more accurate analysis for the peer companies.

Given the adjusted enterprise values, we arrived in the conclusion that Honeywell is overvalued
in comparison to its peer firms. In the most significant multiples, such as EBIT and EBITDA,
Honeywells values are above the average. The multiple EV/EBIT measures a companys
return on investment while EV/EBITDA, one of the most common used and reliable multiple,
compares the value of a company, inclusive of debt and other liabilities, to the actual cash
earnings exclusive of the non-cash expenses. Honeywells enterprise value as a multiple of
sales is in the same levels of the average of the respective multiple of the firms in the industry.
EV/SALES shows how much it costs to the investors to pay for companys sale. That means
that it operates in the same levels as the other firms of the industry. Last, but not least, EV/NET
INCOME is a meaningless multiple because the numerator applies to shareholders and
creditors, but the denominator accrues only to shareholders. Therefore, it does not give us any
additional information for Honeywells valuation.

With respect to the comparable transactions we are going to use the data from the Jumbo deals,
since Honeywells acquisition by GE is considered as a Jumbo deal with a transaction value is
$39bn. Based on the data given, we excluded the GTEs acquisition by Bell Atlantic as an
outlier. This case presents discount premiums either because the sector was out of investors
interest either because of poor performance of the firms or because of the illiquidity of the
assets. With respect to the BP-Amoco transaction the data are not available.
Therefore, we calculate the average of the premium over the stock price between the two
transactions, Quest-US West and Chevron-Texaco. The average of premium over the stock
price prior one month, one week and one day was 33.64, 36.33 and 25.08 respectively. Whereas
the values of stock premium for Honeywell were 48.70, 55.94 and 17.39. In order to evaluate
synergys contribution to Honeywells value we calculate the difference between the
percentage of the stock premium prior one month to one day and the difference between prion
one week to one day. As you may see in the table 10 in appendix, Honeywells difference was
significant higher that the respective of the comparable firms, which means that synergy-added
value in Honeywell is larger than that in the comparable transactions.
4. Potential Merger Synergy

Several synergies could be achieved through the merger between GE and Honeywell. As GE
is specialised in commercial aircraft engines and Honeywell is the leading aircraft subsystem,
such as avionics system, it could make each firms product portfolio as a perfect complement
to another. Additionally, it has been pointed out by academics that the merger would enable
GE to gain market power in those areas where two firms have overlap in product range, such

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 General Electric's proposed acquisition of Honeywell

as large regional jet engine (Grant, 2005). This would allow GE to gain higher bargain power
to customers and, eventually, raising the price of their product.

The merged firm could also engage in product bundling to expand the network of both products.
Fox (2002) suggests that once an aircraft manufacturer, like Airbus and Boeing, chooses one
type of engine and other parts, they are more likely to continue using the same brand of product.
Once GE and Honeywell completed the merger, they can pitch the groups product bundling
to customers by offering a discount. The potential merger synergy can, therefore, be achieved
by stimulated revenue as a number of customers who previously purchase competitor's product
will prefer to use GE/Honeywell bundle and stay that way.

The merger synergy could also be achieved through improved efficiency. Firstly, the
transaction allows two firms to share their competitive technology. In the aerospace industry,
it takes years or even decades to develop a core technology and the related costs are always
substantial. Both two firms possessed several unique technology before the merger. By sharing
these innovative technology, it can substantially reduce the consolidated firms R&D costs.
Secondly, indirect expenses, such as administrative cost, could be reduced through removing
the overlap layers in management and central service department. Since two firms have similar
culture and control system (e.g. Six Sigma) throughout operation process, cost savings could
be achieved in a timely and effective manner.

The synergy can also be reflected from the advantage of economic scale. After merger
completion, the consolidated firms operating activities can raise finance from the debt market
at a lower price as the generally better credit outlook of GE at Aaa rating (Moodys, 2002) can
benefit Honeywell. In addition, GE Capitals enormous financial resources can support
Honeywells research as they will be given more space for the development of innovative
technology. GE, on the other hand, will be able to maintain their high credit rating since the
merger will significantly stimulate the growth in revenue and cash flow generation.

As GEs CEO at the time, Welch added unique value to the proposed merger. During the 20-
year governance, he made significant contribution in restructuring GEs portfolio and made
GEs operations more diversified (Barlett, 2002). His strong understanding in the industry
allows the firm to always keep on the right track of expanding. In addition, Welchs aggressive
cost cutting actions helped GE to save substantial payroll expense (Murray, 2001). It also
allows GE to utilise its resources efficiently in R&D rather than pointless administration. It has
been mentioned by Swaine (2001) that Welchs personality in business and government played
an important role in the GE-Honeywell merger proposal. In fact, the merger between
Honeywell and GE successfully gained support from 11 anti-trust bodies with their approval,
including the Department of Justice. In line with Welchs ambitious, GE kept itself in the front
line of aggressive but valuable M&As. One could argue that, without his contribution to GE, a
proposal at such scale would not even be exist.

5. Return on Gallinellis position - Early closing position

Estimation of ROI on Risk-Arbitrage Position

Position opened 20-Oct-2000 20-Oct-2000
Position closed 1-Mar-2001 1-Jul-2001
Days in holding period 132 254

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 General Electric's proposed acquisition of Honeywell

Position and Payoff in Target Shares

Buy target shares at $41.46 $41.46
Value of target shares at end of holding period $41.82 $43.89
Gross spread per share on target shares $0.36 $2.43
Total value of gross spread on target shares (100) $36 $243
Position and Payoff in Buyer Shares
Short buyer shares at $47.08 $47.08
Value of buyer shares at end of holding period $41.60 $41.60
Gross spread per share on buyer shares $5.48 $5.48
Total value of gross spread on buyer shares (100) $548 $548
Total Assets of the Arbitrage Position $4,146.00 $4,146.00
Short position in buyer shares $4,708.00 $4,708.00
Borrowed shares of buyer ($4,708.00) ($4,708.00)
70% Debt of total Portfolio $2,902.20 $2,902.20
Capital employed $1,243.80 $1,243.80
Total Liabilities & Capital of the Position $4,146.00 $4,146.00
Net Spread Calculation
Gross spread $584.00 $791.00
- Interest @ 15% ($157.43) ($302.94)
- Short dividends foregone $0.00 $0.00
+ Long dividends received $0.00 $0.00
Net spread $426.57 $488.06
Results
Return on capital for holding period only 34.30% 39.24%
Return on capital annualised 94.83% 56.39%
Table 3: Return on Investment on arbitrage position

The return on investment for her position is 34% and 39% for two specific holding period,
respectively as shown in the table above. The short position of GEs share contributed
majority of the return while Honeywells share also provides considerable returns.

6. Arbitrage Spread

The market will react negatively to the review initiated by European Commission with share
prices of both GE and Honeywell going down instantaneously. Reasonably, before the news
was released by regulators, both stocks had been underperforming for several days. This
preceding decrease is typically because the market had anticipated the bad news. As post-event
drift is mainly after news and is usually very robust (Wesley. Chan, 2000), then after the official
announcement, the stocks will continue drifting downwards unless other good news are
presented to the public or the market revises its expectation.

Concerning arbitrage spread, it is defined as the difference between post-announcement share

price for the target firm and the offer price by the bidder (Betton, Eckbo and Thornburn, 2008).
Based on our formulas below,

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 General Electric's proposed acquisition of Honeywell

Pcurrent = prob. x Pbid + (1 prob.) x Pstand-alone (1)

Equation 1

Arbitrage spread = Pbid - Pcurrent (2)

Equation 2

we can arrive at formula (3), which interprets that the spread is related inversely to the
possibility that the deal goes through, i.e. with other factors remaining constant, the higher the
probability of consummation is, the narrower the discrepancy (between todays share price for
the acquiree and the bid price) is, or vice versa.

Arbitrage spread = (Pbid - Pstand-alone) x (1 prob.) (3)

Equation 3

Stand alone value Honeywell

e
w -

ad
ic
y
te

$30.00 $32.86 $34.00 $35.30 $38.00 $40.00 $42.00 $44.00 $47.16 $50.00
l
ne

pr

re
el
Da

G
Ho

Sp
d

Probability
Bi

1-Nov-00 $48.22 $49.17 $51.87 $3.65 83.29% 80.79% 79.56% 77.95% 73.66% 69.22% 62.99% 53.59% 22.44% <0%
15-Nov-00 $46.54 $47.42 $50.03 $3.49 82.58% 79.69% 78.24% 76.32% 71.00% 65.22% 56.55% 42.14% <0% <0%
1-Dec-00 $45.18 $46.06 $48.59 $3.41 81.64% 78.31% 76.61% 74.33% 67.78% 60.28% 48.23% 25.69% <0% >100%
15-Dec-00 $43.31 $44.99 $47.46 $4.15 76.21% 71.56% 69.15% 65.85% 56.10% 44.34% 23.97% <0% <0% >100%
2-Jan-01 $40.03 $39.64 $41.82 $1.79 84.85% 80.03% 77.11% 72.55% 53.14% 1.65% >100% >100% >100% >100%
16-Jan-01 $43.31 $42.93 $45.29 $1.98 87.04% 84.07% 82.45% 80.17% 72.83% 62.56% 39.80% <0% >100% >100%
1-Feb-01 $43.19 $41.89 $44.19 $1.00 92.93% 91.15% 90.15% 88.71% 83.79% 76.06% 54.24% <0% >100% >100%
15-Feb-01 $44.05 $43.48 $45.87 $1.82 88.52% 86.01% 84.66% 82.77% 76.86% 68.98% 52.95% 2.67% >100% >100%
1-Mar-01 $41.82 $41.60 $43.89 $2.07 85.11% 81.26% 79.09% 75.92% 64.88% 46.81% <0% >100% >100% >100%
Table 4: Stand alone value and Probability

Therefore, arbitrage spread is an indicator of the possibility of merger. Specifically, when the
arbitrage is small, good opportunities are that the merger will be conducted eventually. While
when arbitrage spread is big, it may, to a large extent, suggest that the deal will not be
consummated at all (Bruner, 2004). Since the arbitrage spread diminishes at the end of an M&A
when target firms share price equals to the share price of the takeover firm, the conclusion
suits best when M&A is done entirely through stock exchange (Value Research, 2012).

Additionally, as probability always fall into the range of 0 and 1, we delete all cells with
probability outside the range, which occurs Honeywells stand-alone values exceed its share
prices. Nevertheless, it is necessary to clarify that even though we delete these values, it is still
possible for this M&A to be conducted. Because the market always leads bidders to purchase
assets of undervalued targets (Betton, Eckbo, Thorburn, 2008) and when the share price is less
than the stand-alone value, it implies that the firm is undervalued by the market.

To be more specific, Figure 1 in Question 1 demonstrates this inverse relationship between

arbitrage spread and possibility as well. From the declaration of GE-Honeywell merger to the
beginning of December 2000, the arbitrage spread decreased continuously from $4.27 to $2.62.
However, the spread leaped back to $4.15 on December 15th as Honeywell pre-announced its
would-be lower-than-expectation quarter earnings (ICIS Chemical Business, 2001). Its bad
performance and customer uncertainty due to divesting business units may well influence GEs
interest in taking it over. Simultaneously, the market updated the prediction that probability of
consummation would be impaired by the news, which explains the abrupt jump in the spread.
Afterwards, the spread did not go against the decreasing trend until EC announced the antitrust

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 General Electric's proposed acquisition of Honeywell

scrutiny. Since the investigation raised stakeholders concern that this combination would fail
in the end, a significant increase in spread was brought about.

7. Investment Decision

First of all, as already mentioned in question 1, the whole transaction will not be completed in
the first quarter of 2001 and thus lead to higher merger-related expenses (Elliott, 2001). Further
to this, it also diminishes the potential synergies, which are already projected and reflected the
current value of GE and Honeywell. As a result, those news will clearly affect GE and
Honeywell negatively and will lead to falling stock prices, but even more important for
Gallinelli, it will widen the spread between both companies. This is highly unfavourable for
her positions as the share of Honeywell will no longer have the same correlation to GEs stock
price and thus her merger arbitrage strategy will not work anymore.

In our view, the best strategy from this situation is to reduce/close her long position in
Honeywell and increase instead the short holding in GE to profit from falling stock prices.
However, this strategy is hard to follow due to the limited trading volume, nevertheless as an
interesting alternative, she can buy either put options and write call options on both stocks.

Further to this, buying put options is the better alternative than writing call options as on one
hand the implied volatility will increase after the EU-announcement, which will lead to higher
intrinsic value of the option. On the other hand, Gallinelli would only get the option premium,
which would only partly offset her losses, depending on strike price and time to maturity
(Mullaney, 2009). Unfortunately, she will not running a merger arbitrage strategy anymore,
however she will be able to perform clearly better from the dropping stocks. If she is going to
follow a market neutral strategy as it is probably written in the fund prospectus, another
possibility is to bet on widen spread as the deal will not be completed in the first quarter of
2001 and thus the uncertainty of the transaction will increase, which will result in a widen
arbitrage spread. That means, she has to reverse both positions by selling Honeywell and
buying GE stocks simultaneously. To further enhance this strategy, she has to buy as well put
options on Honeywell and buy call options on GE. As a result, she will be able to generate
profit from a widen arbitrage spread in the short-term.

8. Conclusion

First of all, the example of Gallinelli shows us what the merger arbitrage strategy is and how
an individual, mostly hedge funds, can generate market neutral profit by betting on diminishing
spread between both companies. Additionally, it taught us the power of regulators in reality, as
EU Commissioner Monti rejected the merger between two US companies, which is a drawback
of the globalisation in general. Moreover it showed us as well how the market reacts on mergers,
in particular the uncertain prospects caused by a delay of the transaction, which often results
in substantial expenses to both parties.

Multiple method for firm valuation requires a carefully choice of industry peers and
comparable financial ratios. While a robust DCF model requires both reasonable projections
for key ratios and, also, accurate calculations through the model. To analyse the synergy of a
merger, one can look at a specific deal. However, in order to achieve a comprehensive
conclusion, an analysis of the wider industry sector is also necessary as it adds valuable insights.

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 General Electric's proposed acquisition of Honeywell

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10. Appendix

Table 5: Calculations on both positions in Honeywell and GE

March 01, 2001 General Electrics Honeywell

Shares outstanding 9,908,802,000 797,486,000
Stake in the company with 10m
0.1009% 1.2539%
shares
100 days avg. trading volume 18,658,073 5,964,635
max. daily trading volume (5%) 932,904 298,232
Duration to close the position 10.72 days 33.53 days
Table 5: Calculations on both positions in Honeywell and GE

Figure 2: Performance Comparison

Figure 2: Performance Comparison

Table 6: Dividend payout ratio over time

Year 1992 1993 1994 1995 1996 1997 1998 1999 2000
Pay-out ratio 26.7% 24.7% 23.7% 24.8% 25.6% 25.2% 25.2% 34.2% 36.1%
4-year Average (DCF Model) 30.19%
9-year Overall Average 27.38%
Table 6: Dividend payout ratio over time

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Multiple
Table 7: transaction method methods - original
Multiple transaction
Original Peergroup Reasons for non consideration
Net Book
MultipleCompanytransactionEPS method Sales EBIT EBITDA Income EPS Value
Emerson Electric Co. 3.33 2.00 12.26 9.67 21.90 18.86 4.19
Multiple transaction method
Textron Inc.
Original Peergroup 1.55 1.01 8.33 6.35 60.36 28.37 1.55 Reasons for non consideration
Tyco International Ltd. 2.68 3.54 17.80 14.24 22.64
Net 20.49 5.44
Book Non comparable, as operations
Original Peergroup Reasons for non consideration
United Technologies
Company 3.84
EPS 1.33
Sales 11.27
EBIT 9.44
EBITDA 19.57
Income 17.32
EPS 3.87
Value are a different industry
Net Book
General Electric
Emerson ElectricCo. Co. 1.28
3.33 5.09
2.00 22.03
12.26 17.47
9.67 51.22
21.90 36.45
18.86 9.19
4.19 Numbers seem to be outliers
Company EPS Sales EBIT EBITDA Income EPS Value
Honeywell
Textron Inc.Int'l. Inc. 2.06
1.55 1.51
1.01 10.42
8.33 8.18
6.35 22.79
60.36 20.13
28.37 3.44
1.55
Emerson Electric Co. 3.33 2.00 12.26 9.67 21.90 18.86 4.19
Median
Tyco International Ltd. 2.37
2.68 1.76
3.54 11.76
17.80 9.56
14.24 22.72
22.64 20.31
20.49 4.03
5.44 Non comparable, as operations
Textron Inc. 1.55 1.01 8.33 6.35 60.36 28.37 1.55
Average
United Technologies 2.46
3.84 2.41
1.33 13.68
11.27 10.89
9.44 33.08
19.57 23.60
17.32 4.61
3.87 are a different industry
Tyco International Ltd. 2.68 3.54 17.80 14.24 22.64 20.49 5.44 Non comparable, as operations
Exclude Electric
General the Honeywell
Co. from1.28the medians
5.09 22.03 17.47 51.22 36.45 9.19 Numbers seem to be outliers
United Technologies 3.84 1.33 11.27 9.44 19.57 17.32 3.87 are a different industry
Exclude
Honeywell theInt'l.
outliers
Inc. 2.06 1.51 10.42 8.18 22.79 20.13 3.44
General Electric Co. 1.28 5.09 22.03 17.47 51.22 36.45 9.19 Numbers seem to be outliers
Median 2.37 1.76 11.76 9.56 22.72 20.31 4.03
Table 7: Peergroup
Honeywell
Refined Multiple
Int'l. Inc. transaction
2.06 methods
1.51 - original
10.42 8.18 22.79 20.13 3.44
Average 2.46 2.41 13.68 10.89 33.08 23.60 4.61
Median 2.37 1.76 11.76 9.56 22.72
Net 20.31 4.03
Exclude the Honeywell from the medians
Average
Company 2.46
EPS 2.41
Sales 13.68
EBIT 10.89
EBITDA 33.08
Income 23.60 4.61
EPS Book Value
Exclude
Table the
8: outliers
Multiple transaction methods - redifined
Exclude the Honeywell
Emerson Electric Co. from the
3.33 medians
2.00 12.26 9.67 21.90 18.86 4.19
Exclude the outliers
Textron Inc. 1.55 1.01 8.33 6.35 60.36 28.37 1.55
Refined Peergroup
United Technologies 3.84 1.33 11.27 9.44 19.57
Net 17.32 3.87
Refined
Median Peergroup 3.33 1.33 11.27 9.44 21.90 18.86 3.87
Company EPS Sales EBIT EBITDA Income EPS Book Value
Average Electric Co. 2.91 1.45 10.62 8.49 Net
33.94 21.52 3.20
Emerson 3.33 2.00 12.26 9.67 21.90 18.86 4.19
Company EPS Sales EBIT EBITDA Income EPS Book Value
Textron Inc. 1.55 1.01 8.33 6.35 60.36 28.37 1.55
Emerson Electric Co. 3.33 2.00 12.26 9.67 21.90 18.86 4.19
United Technologies 3.84 1.33 11.27 9.44 19.57 17.32 3.87
Textron Inc. 1.55 1.01 8.33 6.35 60.36 28.37 1.55
Median 3.33 1.33 11.27 9.44 21.90 18.86 3.87
United Technologies 3.84 1.33 11.27 9.44 19.57
EV/Net 17.32 3.87
Average 2.91 1.45
EV/Sales 10.62
EV/EBIT 8.49 33.94 21.52 3.20
Median 3.33 1.33 11.27 EV/EBITDA
9.44 21.90 Average
Income 18.86 3.87
Table
Average8: Multiple transaction 2.91 methods
1.45 - redifined
10.62 8.49 33.94 21.52 3.20
Sales 25,023
EBITDA 3,629
Table
EBIT 9: Multiple 4,624
transaction methods - resultEV/Net
EV/Sales EV/EBIT EV/EBITDA Average
Net Income 1,659 Income
EV/Net
Enterprise value (Refined
Sales 25,023 EV/Sales EV/EBIT EV/EBITDA Average
36,198.5 49,097.0 30,796.4 Income
56,311.6 43,100.9
EBITDA Peergroup) 3,629
Sales 25,023
EBIT 4,624
Enterprise value (Original
EBITDA 3,629 60,400.6 63,277.9 39,521.1 54,882.5 54,520.5
Net IncomePeergroup) 1,659
EBIT 4,624
Enterprise value (Refined
Net Income 1,659 36,198.5 49,097.0 30,796.4 56,311.6 43,100.9
Peergroup)
Enterprise value (Refined
Enterprise value (Original 36,198.5 49,097.0 30,796.4 56,311.6 43,100.9
Peergroup) 60,400.6 63,277.9 39,521.1 54,882.5 54,520.5
Peergroup)
Enterprise value (Original
60,400.6 63,277.9 39,521.1 54,882.5 54,520.5
Peergroup)
Table 9: Multiple transaction methods - result

Table 10: Comparable transactions

Comparable transactions
Honeywell's
Target Name GTE Amoco US WEST Texaco Average premium over
Acquirer Name Bell Atlantic BP Quest Chevron stock price
Premium over stock price:
1 day prior (%) -2.72 na 32.48 17.68 25.08 17.39
1 week prior (%) -2.72 na 50.11 22.55 36.33 55.94
1 month prior (%) -4.94 na 49.77 17.51 33.64 48.70
GTE Acquisition from Bell Atlantic excluded as an outlier
Not available data for Amoco's acquisition from BP

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 General Electric's proposed acquisition of Honeywell

Table 11: Adjusted Stand alone valueation Honeywell

Stand-Alone Valuation Summary Honeywell International
Multiples Enterprise Value Equity Value
Low High Low High Low High
Trading value prior to merger $24,340 $29,533
announcement
Per share $30.37 $36.85
Comparable firms:
Enterprise value as a multiple
of:
2000 revenue 1.01 2 25,273 50,046 17,019 41,792
Per share 21 52.15
2000 EBIT 8.33 12.26 23,982 35,297 15,728 27,042.54
Per share 20 33.74
2000 EBITDA 6.35 9.67 19,279 29,358 11,025 21,104.12
Per share 14 26.33
2000 net income 19.57 60.36 32,467 100,137 24,213 91,883
Per share 30 52.15
Equity value as a multiple of:
2000 EPS 17.32 28.37408 28,734 47,073
Per share 35.85 58.73
2000 book value 1.55 4.19 15,046 40,672
Per share 18.77 50.75
Median equity value 17,019 $40,672
Per share $21.24 $50.75

able 10:Adjusted Stand alone valueation Honeywell

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 General Electric's proposed acquisition of Honeywell

Table 11: Stand alone value and Probability (extended)

Stand alone value Honeywell
$30.00 $32.86 $34.00 $35.30 $38.00 $40.00 $42.00 $44.00 $47.16 $50.00
Date Honeywell GE Bid price Spread Probability
24-Oct-00 $48.05 $48.21 $50.86 $2.81 86.52% 84.39% 83.33% 81.93% 78.14% 74.11% 68.27% 59.02% 23.98% <0%
25-Oct-00 $47.09 $47.81 $50.44 $3.35 83.61% 80.95% 79.63% 77.88% 73.07% 67.91% 60.31% 47.98% <0% <0%
26-Oct-00 $47.04 $47.08 $49.67 $2.63 86.63% 84.36% 83.22% 81.70% 77.47% 72.81% 65.72% 53.62% <0% >100%
27-Oct-00 $46.42 $47.19 $49.79 $3.37 82.99% 80.12% 78.68% 76.77% 71.44% 65.61% 56.77% 41.83% <0% >100%
30-Oct-00 $48.45 $48.77 $51.45 $3.00 86.00% 83.86% 82.80% 81.41% 77.68% 73.78% 68.24% 59.71% 30.01% <0%
31-Oct-00 $48.50 $49.50 $52.22 $3.72 83.25% 80.78% 79.57% 78.00% 73.83% 69.54% 63.59% 54.73% 26.43% <0%
1-Nov-00 $48.22 $49.17 $51.87 $3.65 83.29% 80.79% 79.56% 77.95% 73.66% 69.22% 62.99% 53.59% 22.44% <0%
6-Nov-00 $47.66 $49.22 $51.93 $4.27 80.54% 77.63% 76.20% 74.34% 69.36% 64.22% 57.02% 46.17% 10.43% <0%
7-Nov-00 $48.90 $49.62 $52.35 $3.45 84.57% 82.31% 81.20% 79.77% 75.96% 72.07% 66.67% 58.69% 33.49% <0%
8-Nov-00 $48.22 $49.28 $51.99 $3.77 82.85% 80.30% 79.04% 77.41% 73.05% 68.55% 62.26% 52.81% 21.90% <0%
9-Nov-00 $48.39 $49.28 $51.99 $3.60 83.63% 81.18% 79.99% 78.43% 74.27% 69.97% 63.96% 54.94% 25.42% <0%
10-Nov-00 $48.11 $48.66 $51.34 $3.23 84.88% 82.54% 81.39% 79.88% 75.81% 71.54% 65.44% 56.02% 22.69% <0%
13-Nov-00 $45.63 $46.46 $49.02 $3.39 82.20% 79.05% 77.45% 75.32% 69.27% 62.45% 51.74% 32.50% <0% >100%
14-Nov-00 $46.76 $47.64 $50.26 $3.50 82.72% 79.89% 78.47% 76.61% 71.45% 65.89% 57.63% 44.09% <0% <0%
15-Nov-00 $46.54 $47.42 $50.03 $3.49 82.58% 79.69% 78.24% 76.32% 71.00% 65.22% 56.55% 42.14% <0% <0%
16-Nov-00 $46.59 $47.53 $50.14 $3.55 82.36% 79.44% 77.98% 76.06% 70.73% 64.96% 56.36% 42.15% <0% <0%
17-Nov-00 $46.14 $46.86 $49.44 $3.30 83.04% 80.12% 78.64% 76.68% 71.17% 65.06% 55.67% 39.36% <0% >100%
20-Nov-00 $44.55 $45.21 $47.70 $3.15 82.22% 78.80% 77.03% 74.62% 67.55% 59.12% 44.76% 14.88% <0% >100%
21-Nov-00 $45.12 $45.84 $48.36 $3.24 82.35% 79.10% 77.43% 75.19% 68.72% 61.24% 49.05% 25.68% <0% >100%
22-Nov-00 $43.65 $43.86 $46.27 $2.62 83.88% 80.46% 78.63% 76.10% 68.30% 58.19% 38.62% <0% >100% >100%
27-Nov-00 $43.99 $44.37 $46.81 $2.82 83.22% 79.79% 77.98% 75.50% 67.99% 58.59% 41.37% <0% >100% >100%
29-Nov-00 $43.70 $44.88 $47.35 $3.65 78.97% 74.83% 72.67% 69.72% 60.97% 50.35% 31.79% <0% <0% >100%
30-Nov-00 $44.10 $44.76 $47.22 $3.12 81.87% 78.27% 76.39% 73.82% 66.15% 56.77% 40.22% 3.10% <0% >100%
1-Dec-00 $45.18 $46.06 $48.59 $3.41 81.64% 78.31% 76.61% 74.33% 67.78% 60.28% 48.23% 25.69% <0% >100%
4-Dec-00 $45.80 $46.63 $49.19 $3.39 82.31% 79.22% 77.66% 75.57% 69.68% 63.08% 52.82% 34.65% <0% >100%
5-Dec-00 $47.89 $48.89 $51.58 $3.69 82.90% 80.30% 79.01% 77.34% 72.83% 68.14% 61.49% 51.33% 16.46% <0%
6-Dec-00 $47.89 $48.72 $51.40 $3.51 83.60% 81.07% 79.83% 78.20% 73.81% 69.21% 62.66% 52.57% 17.16% <0%
7-Dec-00 $47.61 $48.32 $50.98 $3.37 83.95% 81.42% 80.16% 78.52% 74.05% 69.32% 62.49% 51.74% 11.72% <0%
8-Dec-00 $49.30 $49.85 $52.59 $3.29 85.43% 83.32% 82.29% 80.97% 77.44% 73.86% 68.92% 61.69% 39.37% <0%
11-Dec-00 $49.93 $49.95 $52.70 $2.77 87.81% 86.05% 85.20% 84.10% 81.17% 78.21% 74.13% 68.18% 50.00% <0%
12-Dec-00 $47.16 $47.70 $50.32 $3.16 84.43% 81.89% 80.62% 78.95% 74.33% 69.36% 61.99% 49.97% -0.09% <0%
13-Dec-00 $47.16 $47.87 $50.50 $3.34 83.70% 81.06% 79.74% 78.01% 73.26% 68.17% 60.69% 48.59% -0.09% <0%
14-Dec-00 $45.74 $46.46 $49.02 $3.28 82.78% 79.73% 78.19% 76.12% 70.27% 63.67% 53.31% 34.69% <0% >100%
15-Dec-00 $43.31 $44.99 $47.46 $4.15 76.21% 71.56% 69.15% 65.85% 56.10% 44.34% 23.97% <0% <0% >100%
18-Dec-00 $45.00 $46.06 $48.59 $3.59 80.67% 77.17% 75.38% 72.97% 66.08% 58.18% 45.50% 21.77% <0% >100%
19-Dec-00 $44.22 $45.28 $47.77 $3.55 80.02% 76.20% 74.22% 71.53% 63.66% 54.31% 38.47% 5.83% <0% >100%
20-Dec-00 $41.61 $42.85 $45.21 $3.60 76.35% 70.88% 67.91% 63.70% 50.09% 30.92% <0% <0% >100% >100%
22-Dec-00 $43.20 $44.15 $46.58 $3.38 79.62% 75.38% 73.14% 70.05% 60.62% 48.65% 26.21% <0% >100% >100%
26-Dec-00 $43.42 $44.54 $46.99 $3.57 78.99% 74.75% 72.52% 69.47% 60.29% 48.93% 28.46% <0% >100% >100%
28-Dec-00 $43.37 $43.89 $46.30 $2.93 82.00% 78.18% 76.15% 73.34% 64.67% 53.46% 31.83% <0% >100% >100%
29-Dec-00 $42.80 $43.44 $45.83 $3.03 80.86% 76.65% 74.39% 71.24% 61.31% 48.03% 20.89% <0% >100% >100%
2-Jan-01 $40.03 $39.64 $41.82 $1.79 84.85% 80.03% 77.11% 72.55% 53.14% 1.65% >100% >100% >100% >100%
3-Jan-01 $43.54 $43.32 $45.70 $2.16 86.23% 83.17% 81.52% 79.21% 71.92% 62.08% 41.59% <0% >100% >100%
4-Jan-01 $43.48 $43.55 $45.95 $2.47 84.54% 81.17% 79.36% 76.85% 68.97% 58.53% 37.51% <0% >100% >100%
5-Jan-01 $42.46 $42.87 $45.23 $2.77 81.82% 77.63% 75.35% 72.13% 61.71% 47.06% 14.25% <0% >100% >100%
8-Jan-01 $41.33 $41.28 $43.55 $2.22 83.61% 79.24% 76.75% 73.09% 60.00% 37.46% <0% >100% >100% >100%
9-Jan-01 $40.43 $40.44 $42.66 $2.23 82.36% 77.22% 74.21% 69.67% 52.10% 16.14% <0% >100% >100% >100%
10-Jan-01 $40.88 $40.49 $42.72 $1.84 85.56% 81.37% 78.93% 75.24% 61.06% 32.39% <0% >100% >100% >100%
11-Jan-01 $42.86 $42.19 $44.51 $1.65 88.63% 85.84% 84.30% 82.08% 74.65% 63.41% 34.26% <0% >100% >100%
12-Jan-01 $42.06 $41.40 $43.68 $1.62 88.18% 85.06% 83.29% 80.70% 71.52% 56.02% 3.58% >100% >100% >100%
16-Jan-01 $43.31 $42.93 $45.29 $1.98 87.04% 84.07% 82.45% 80.17% 72.83% 62.56% 39.80% <0% >100% >100%
17-Jan-01 $43.42 $42.31 $44.64 $1.22 91.69% 89.67% 88.56% 86.97% 81.66% 73.75% 53.85% <0% >100% >100%
18-Jan-01 $44.22 $43.16 $45.53 $1.31 91.54% 89.64% 88.61% 87.16% 82.56% 76.26% 62.82% 14.34% >100% >100%
19-Jan-01 $43.77 $42.59 $44.93 $1.16 92.22% 90.38% 89.37% 87.93% 83.23% 76.43% 60.36% <0% >100% >100%
22-Jan-01 $42.57 $41.45 $43.73 $1.16 91.55% 89.34% 88.08% 86.25% 79.76% 68.91% 32.95% >100% >100% >100%
24-Jan-01 $42.86 $41.96 $44.27 $1.41 90.13% 87.66% 86.29% 84.30% 77.54% 67.01% 37.92% <0% >100% >100%
25-Jan-01 $42.80 $41.63 $43.92 $1.12 91.96% 89.88% 88.71% 87.01% 81.09% 71.43% 41.67% >100% >100% >100%
26-Jan-01 $42.01 $40.44 $42.66 $0.65 94.83% 93.33% 92.45% 91.12% 85.97% 75.44% 1.51% >100% >100% >100%
29-Jan-01 $41.43 $40.21 $42.42 $0.99 92.02% 89.64% 88.23% 86.08% 77.57% 59.05% <0% >100% >100% >100%
30-Jan-01 $42.85 $41.91 $44.22 $1.37 90.40% 87.98% 86.64% 84.69% 78.04% 67.61% 38.37% <0% >100% >100%
31-Jan-01 $42.74 $41.66 $43.95 $1.21 91.32% 89.08% 87.83% 86.00% 79.65% 69.34% 37.92% >100% >100% >100%
1-Feb-01 $43.19 $41.89 $44.19 $1.00 92.93% 91.15% 90.15% 88.71% 83.79% 76.06% 54.24% <0% >100% >100%
2-Feb-01 $43.15 $41.93 $44.24 $1.09 92.37% 90.46% 89.39% 87.85% 82.58% 74.36% 51.43% <0% >100% >100%
5-Feb-01 $44.71 $43.36 $45.74 $1.03 93.43% 91.97% 91.19% 90.09% 86.64% 81.99% 72.37% 40.69% >100% >100%
6-Feb-01 $44.55 $43.13 $45.50 $0.95 93.86% 92.47% 91.72% 90.67% 87.31% 82.69% 72.81% 36.61% >100% >100%
7-Feb-01 $43.92 $42.54 $44.88 $0.96 93.55% 92.02% 91.18% 89.98% 86.05% 80.33% 66.67% <0% >100% >100%
8-Feb-01 $44.13 $42.71 $45.06 $0.93 93.83% 92.39% 91.60% 90.48% 86.84% 81.64% 69.63% 12.28% >100% >100%
9-Feb-01 $42.70 $41.37 $43.65 $0.95 93.07% 91.24% 90.20% 88.67% 83.25% 74.07% 42.54% >100% >100% >100%
12-Feb-01 $44.38 $43.05 $45.42 $1.04 93.27% 91.74% 90.91% 89.75% 86.01% 80.85% 69.64% 26.80% >100% >100%
13-Feb-01 $44.05 $42.73 $45.08 $1.03 93.17% 91.57% 90.70% 89.47% 85.45% 79.72% 66.56% 4.63% >100% >100%
14-Feb-01 $43.12 $41.92 $44.23 $1.11 92.23% 90.28% 89.19% 87.62% 82.24% 73.84% 50.32% <0% >100% >100%
15-Feb-01 $44.05 $43.48 $45.87 $1.82 88.52% 86.01% 84.66% 82.77% 76.86% 68.98% 52.95% 2.67% >100% >100%
16-Feb-01 $43.78 $42.59 $44.93 $1.15 92.28% 90.46% 89.46% 88.04% 83.38% 76.64% 60.70% <0% >100% >100%
20-Feb-01 $44.68 $43.21 $45.59 $0.91 94.18% 92.88% 92.18% 91.19% 88.05% 83.77% 74.72% 42.86% >100% >100%
21-Feb-01 $44.20 $42.86 $45.22 $1.02 93.31% 91.77% 90.93% 89.74% 85.90% 80.50% 68.38% 16.43% >100% >100%
22-Feb-01 $43.77 $42.68 $45.03 $1.26 91.63% 89.67% 88.60% 87.08% 82.11% 74.99% 58.47% <0% >100% >100%
23-Feb-01 $42.69 $41.84 $44.14 $1.45 89.74% 87.14% 85.69% 83.59% 76.37% 64.96% 32.22% <0% >100% >100%
26-Feb-01 $44.21 $43.48 $45.87 $1.66 89.53% 87.24% 86.01% 84.29% 78.89% 71.70% 57.09% 11.22% >100% >100%
27-Feb-01 $43.73 $43.49 $45.88 $2.15 86.45% 83.48% 81.89% 79.67% 72.70% 63.41% 44.57% <0% >100% >100%
28-Feb-01 $42.44 $42.13 $44.45 $2.01 86.11% 82.69% 80.79% 78.06% 68.87% 54.87% 17.98% <0% >100% >100%
1-Mar-01 $41.82 $41.60 $43.89 $2.07 85.11% 81.26% 79.09% 75.92% 64.88% 46.81% <0% >100% >100% >100%
Table 11: Stand alone value and Probability (extended)

SMM122 Page 19