MorningWord 7/14/15: Foresight of Memory Deal – $MU

by Dan July 14, 2015 9:14 am • Commentary

Prior to last night’s report from the WSJ that government owned Chinese company Tsinghua offered to pay $21 a share ($23 billion) for Micron (MU), the stock had declined 50% from its 52 week highs made in late December.  The proposed deal closely follows other massive semiconductor deals including the largest tech deal ever announced in late May of Avago paying $37 billion for Broadcom and Intel’s agreement to buy Altera for $17 billion in cash on June 1st, making the year to date acquisition announcements in the semi space close to $85 billion.

Last Monday, there was a fairly aggressive buyer of August 19 calls in MU, then very near the money; from our Big Printin’ post that day:

1. MU – The stock continues its ytd implosion, down almost 4% today, marking a 30% decline over the last month.  At least one trader appears to be looking the other way, shortly after noon there was an opening buyer of 30,000 of the MU Aug 19 calls for .83 when the stock was $18.78.  And then a few hours later when the stock was $18.50 there was a buyer to open of 20,000 of the Aug 19 calls for .81 to open, making a total of 75,000 trading on the day.  Break-even on these calls is just below $20 level the stock broke-down below falling their disappointing earnings report two weeks ago and should serve as meaningful technical resistance for the time being:

MU 2yr chart from Bloomberg

Shares of  Micron are trading up about $2, or about 11% on the news. At the very least this bid should put a floor in the stock in the high teens for the time being, but I suspect that A. shareholders will want more cash by an acquirer, and B. an acquisition proposal by a Chinese government owned entity will face a great deal of regulatory scrutiny in this country, which should have the stock trading at a significant discount to the proposed takeout price. Frankly I would be surprised if the deal happened at all.

As for the call buying in the stock last Monday?  Well, the choice of August was definitely curious as there were no identifiable catalysts, and the near the money aspect of the calls also seems oddly specific. My Fast Money friend Pete Najarian and I were discussing the call buying last Monday prior to the show, and he made a good point in response to my comment that there are “there are no scheduled events between now and Aug expiration” (something that we look for with unusual options activity) was that it could be a trader who was short the stock, who has had a very nice trade and was looking to define their risk over the next 6 weeks. That could make sense as there is over 60 million shares sold short, but that seems like a lot to pay as Monday’s large block trades amounted to about $6 million in options premium that would go poof if the stock was $19 or below.

But without getting all Oliver Stone on you, this call buying looks suspect to me. Normally, traders who are speculating on a potential take-over will look for options that offer the most potential leverage, and have some time for the deal to play out. The flip side of that is if you had a better sense on timing and price (if a little birdie told you) , you would likely try to find options that act more like stock and that means in the money or at the money and only a month or two out.