2 Cheap Ways to Speculate on Genzyme Buyout

Genzyme Corporation (NASDAQ: GENZ) has been a biotech buyout target for more than two weeks now. The “buyout chatter” has a first offer coming from Sanofi-Aventis SA (NYSE: SNY) in a letter to the company for around $69 per share.

There has been speculation that Genzyme needs $74 to $77 to get a deal on the table, but that is just speculation. Some feel it will either get looked at by competing interests or that the price will have to go higher.

The problem is that the deal premium is eroding in early trading. Patience may be running thin here. The stock traded above $70 on several days during the past two weeks on buyout rumors because of hope for a higher price. 

Sanofi-Aventis may or may not have competition here. Some have thrown out other names as acquirers, but it is all speculation rather than fact. Whether these other companies are capable and willing is another issue altogether.

There is a lesson here worth noting: When it comes to investing or trading solely on merger hopes, if any problems arise, traders who bought speculative put options could see a huge payday.

Genzyme’s operations have suffered under the manufacturing woes, and its FDA problems resulted in a $175 million charge. The company is off track and its guidance has failed to inspire investors. It has also allowed competition to get a leg up during its time of trouble.

August options expire in nine days on Aug. 20. As the stock price movement has been elevated for more than two weeks now, it seems a certainty that the deal, the terms, and the willingness of Genzyme would likely be known over the next 11 days (nine trading days) before options expiration date, so there’s no reason to speculate beyond August. 

With Genzyme shares down more than 1% at $68.10, the pressure is starting to mount. The GENZ Aug 65 Puts are being offered at $1.10.

If the deal falls apart for any reason, Genzyme shares should tank. If the deal comes apart because of worries over due diligence in the period ahead or due to discussions with partners, then Genzyme could find itself back in the mid-$50s. If the reason is that Genzyme is unwilling to sell, then the stock might only fall to $60 or a tad higher.

This is all speculation, of course. Genzyme could always float out that it has a higher priced deal. If you think that is the case, then the GENZ Aug 72.50 Calls (which were at 70 cents at the time of this writing) are probably the right options to buy. The bulk of the open interest is skewed to the call options.

source:optionszone