Silly Pricing?

Sometimes market mechanics (who has money, who faces a liquidity crunch, and what valuable holdings are in the hands of -- and subject to liquidation by -- people needing immediate liquidity, how many shares are being offered for sale compared to ordinary trading volumes, etc.) are more important to short-term prices than are fundamental valuation metrics. The Quote Of The Day in regard to irrational short-term pricing comes from WinLoseOrDraw, a poster on the Apple board at InvestorsHub:

If anyone has a cogent explanation for why Merrill Lynch announced a $29 buyout yesterday and is trading at $17 today, I'd be delighted to sit and listen.
WinLoseOrDraw, Apple Board post 79639

I think the extent to which financials are too hated for their ownership to be admitted by institutions with window-dressing issues is a concern, as is the concern that an all-stock buyout deal valued at $29 in future-delivered shares of a financial company subject to more financial-related bad news carries a lot more risk than an offer for $29 in cash now. Since anyone too scared of Merrill Lynch because of its subprime exposure is probably similarly scared of Bank of America, the price disparity giving rise to the question isn't likely to drive new money into the shares.

The interesting thing about some of these companies is that the market currently values their trading businesses as worthless, when in fact each has had some success creating income from trading. The losses aren't trading losses, they're losses caused by the fee-generating side of the business when they wanted to package up a bunch of subprime garbage, couldn't find buyers, and decided that because some rating agency could be paid to bless the instruments with AAA ratings that they didn't pose a material risk of loss and need not be disclosed to shareholders. It's hard from where I stand to decide whether the subprime exposure is so great that it doesn't matter what the trading business is worth, or whether the devaluation of the trading business creates a buy op.

In the interest of full disclosure, I haven't done the kind of careful watching on Merril Lynch, Bank of America, or Lehmann than I have on American Capital; I don't pretend to have a clear view of their fundamental worth, or their competitive positions in their markets. I do have a view of what uncertainty does to buyers' appetites, and a firm impression that promising the future delivery of $29 worth of Bank of American shares, as calculated using today's price rather than the price that obtains at the date of the transfer, isn't so obviously worth more than the delivery of $17 in cash today that we should conclude people are crazy for not jumping at the chance -- expecially for people who already have interest in (and expsure to) financials, and may now want to magnify that exposure with new positions. The exit strategy for the Merrill Lynch purchase isn't cash but an exchange of shares in another financial stock.

Prospective buyers may be full to the gills of financials and unwilling to accept the proposed exit from Merrill Lynch shares into Bank of America shares. Show us an all-cash buy offer, and the market mechanics will show you a new price for Merrill Lynch.