Cummins (CMI) – Split Off – $1600 Upside

Current Price – $272

Offer Price – $291

Upside – 7.1% or $1600 for odd-lot positions

Expiration date – March 13 (tomorrow)

Important note (Mar 12): The pitch below was posted on Feb 15, when there was still a month left till tender expiration, borrow for hedging was expensive/unavailable and the exchange ratio was not known. I noted that I was staying on the sidelines and that situation would be reassessed closer to the offer expiration. Yesterday the final exchange ratio was determined and there is currently borrow available for hedging. As such, I have opened a hedged CMI / ATMU position this morning and brought this situation among the Tracking Portfolio ideas.

Trade calculations:
– Long CMI at $272;
– Short ATMU at $24.21;
– Exchange ratio 12.0298;
– Number of ATMU shares to be received in exchange for 99 CMI shares = 1191;
– Upside before borrow fees stands at $1900 (or +7.1%);
– Borrow fees are at 55% currently. Short position to be held for c. 1 week, so will consume approximately $300.
– Total expected gain = $1600.
– Deadline for tender submission at Interactive Brokers is Mar 13, 2024 13:00 EDT (other brokers might have different deadlines, some of which might have already passed).

 

Pitch as was posted on Feb 15

This is a double jubilee – the 20th split-off covered on SSI over the last 10 years. However, at the moment it also seems to be one of the riskiest ones that I’ve covered so far. Hedging is unavailable, while going unhedged poses substantial risks due to exposure to stock volatility during the tender period as well as the potential sell-off after the tender closes. Both could easily eliminate the current 7.53% spread. I’m staying on the sidelines at the moment, however, I will continue tracking the situation and will reassess it closer to the final ratio announcement day or in case borrow suddenly reappears. My standard split-off case analysis is presented below.

As usual, I recommend checking my in-depth Analysis of Split-off Trading Strategies to have a better understanding of share price behavior, risks, and possible trading strategies in this kind of transaction. The two latest split-offs were JNJ/KVUE (2023) and MMM/NEOG (2022). So far, all the split-offs proceeded on announced (or improved) terms and none were canceled. However, arbitrage on some of them did not generate the expected returns due to hedging costs/availability or unfavorable share price movements for unhedged positions.

Vehicle engine and powertrain components giant Cummins ($37bn mcap) is divesting all of its 80.5% stake in Atmus Filtration Technologies, its filtration products arm that was IPO’ed a few quarters ago. Shareholders of CMI have the option to participate in the tender and exchange their CMI shares for ATMU at a 7.53% premium. The tender expires on the 13th of March – different brokers might have different deadlines for tender participation.

Every $100 of CMI stock accepted in the tender will be converted into $107.53 of ATMU stock subject to the upper limit of 13.3965 ATMU shares per each CMI share. The exchange ratio will be determined on the 11h of March and calculated using the VWAP prices of both companies during the 7-11th of March. At current prices, the upper limit is not in effect and tender offer participants would receive 7.53% premium in the exchange. Odd lot holders (<100 shares) will be accepted on a priority basis and won’t get prorated and this is where the $1940+ return could theoretically be generated.

There are a few drawbacks to this split-off compared to other similar transactions covered over the recent years. The first one is that borrow is basically non-existent. IB doesn’t show any availability at the moment and even if you could somehow open the short position on ATMU, the fee rate is already at 28%, while the risk of it spiking and eliminating most of the upside would be substantial. Not to mention the risk of a forced buy-in. Hedging through options could be possible, however, is too expensive at the moment as the premium paid would eliminate most of the upside.

Secondly, ATMU’s float is just 19.5% (sold by CMI during last year’s IPO). The float is going to increase 5x following the split-off. ATMU is a speck compared to CMI in terms of size and also doesn’t pay any dividends unlike its previous parent. Thus, a lot of the new ATMU shareholders might decide to head for the exit, which would naturally create a strong sell-off pressure following the tender completion. It is not an unhedged-trade-friendly setup.

Thirdly, it’s difficult to find any firm fundamental support for the current ATMU share price that could offset the sell-off dynamics. ATMU manufactures filtration products (fuel filters, air filters, lube filters, etc.), primarily under Fleetguard brand. It’s still a fresh IPO with only 3 quarters of detailed financials released. There are also no good peers for comparison as most other public players are diversified industry giants. On the one hand, it seems like a fairly stable business that generates a lot of cash and trades at seemingly undemanding 7.5x 2023 EBITDA and 12x 2023 adj. FCF. On the other hand, it’s a relatively small player in a slow-growth industry that’s bound to turn into a melting ice cube in the longer term (as customers gradually transition into EVs). Another thing I’m slightly concerned about is that together with the split-off announcement ATMU also released annual results and the 2024 guidance painted a picture of significant slowdown in growth with revenue expected to increase less than 1% vs mid-high single digit growth seen over the previous years. In the conf. call, management also reiterated the focus on M&A instead of initiating dividends. The share price hasn’t reacted much so far, yet it further adds to the uncertainty around the share price support after the tender completion, especially when ATMU already trades at 13% premium to the IPO price.

One last thing, CMI is expected to pay a dividend on March 7 to shareholders of record as of Feb 23. The dividend will be $1.68/share or 0.6% of CMI’s current share price.

 

Important points/risks to consider (similar to other split-offs):

  • Upper limit. The transaction is subject to the upper limit of 13.3965 ATMU shares per share of CMI. The upper limit is currently not in effect. Due to the presence of the upper limit, the spread might get eliminated if e.g. CMI gets more expensive and/or ATMU gets cheaper. The parties have created a website to track the exchange ratio and share price VWAPs – here.
  • Odd-lots are exempt from proration. Holders of 99 shares or less will be exempt from proration.
  • Oversubscription. The maximum amount of CMI shares that will be accepted in the tender is only 3.5%, a bit lower than the average for previous cases (around 5%). Nearly all of the previous split-offs have been heavily oversubscribed (10x-20x). It’s pretty much guaranteed that CMI/ATMU transaction will also be oversubscribed, hence, this trade is applicable to odd-lot positions only.
  • Limited borrow. Hedging is currently unavailable. However, even if it will eventually re-appear, there is a chance that the borrow fee will be very high and volatile, which could eliminate the upside in part or completely. Hedging under these conditions creates a forced buy-in risk – this happened for a couple of previous split-offs.
  • Unhedged trade is very risky. SSI analysis shows that on average unhedged split-off arbitrage results in higher returns – 13 out of 18 transactions had higher profits with unhedged positions. However, the talk here is only about a 7% spread and there is a substantial risk that unhedged trades will result in a loss due to volatility in CMI share price till tender expiration or ATMU sell-off after tender expiration (it takes c. one week to receive exchanged shares).
  • Final exchange ratio and timing of the position opening. The final exchange ratio will be determined based on the VWAPs of a few days before the final ratio announcement (March 11), so one might wait till then to enter the position. IB deadline for tendering is usually noon on the expiration date, other brokers might have other deadlines. The final exchange ratio usually ends up at or close to the upper limit, I would expect a similar outcome here.
  • Risk of Odd-lot provision cancellation. This provision has never been canceled in a split-off transaction so far. The maximum amount of odd-lot shares participating in a split-off was close to 2m vs 5m of CMI shares that can potentially be accepted in this offer. At least theoretically, the risk of odd-lot cancellation remains, however seems very low, especially given no borrow availability for CMI/ATMU trade.
  • Minimum participation amount. The tender is conditioned on at least 50% participation (half of ATMU stake held by CMI exchanged in the offer), although the condition can be waived. In an unlikely event that the tender ends up undersubscribed, CMI would just distribute the remaining ATMU shares to shareholders as of record on a pro-rata basis.

 

111 Comments

111 thoughts on “Cummins (CMI) – Split Off – $1600 Upside”

    • Yes, with cheap hedging I could just lock in the 7% spread. There would still be some risk regarding the final exchange ratio, but in majority of the split-off cases I participated the eventual exchange ratio ended up at the upper limit.

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  1. Hi dt, thanks for the detailed write up. Do you have any data on the performance of split-offs where the sub was unshortable?

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    • No, I do not have this info compiled in one place, however, all split-offs were covered on SSI, so you could browse through the previous post to check if any conclusions could be drawn from that.

      My personal opinion -I don’t think that kind of data would be meaningful as each case is different. For example, IFF in 2021 (DD/IFF split-off) was also mostly unshortable. Yet, the arb resulted in 17% profit as IFF share price jumped after the tender expiration. However, IFF float increased “only” 2x following the split-off (vs 5x in CMI/ATMU situation).

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  2. Thanks dt. It sounds like there could be a few factors at play and not enough data to draw any meaningful conclusions. Will keep an eye out for IB borrow. Cheers

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  3. I was able to short ATMU 2/28/2024 in IBKR which said there is an additional 200K shares available to short (as opposed to Fidelity, which said there weren’t any available shares to short).

    My calculation of the cost of my short is it will take 1 month (i.e., from 2/28/2024 to 3/28/2024 which I expect the ATMI long shares will be in my account by that date) and is equal to $1,130 total cost (=$27K for the equivalent dollar amount of short ATMU shares as for 99 long shares of CMI * {50.2% annual fee rate / 12 months}).

    Therefore, my total profit on this trade is equal to $810 (= $1,940 – $1,130) provided the “upper limit” isn’t exceeded…Thus, I’m still making money on this trade (unless I did the math wrong…Dalius or someone else – please correct me if I’m wrong?). Thanks.

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    • The problem is that the shares can be called and the forced buy in would leave your long position unhedged. I wonder if there is any way to ‘lock up/ shares for a set time?

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      • On IBKR I don’t know how to ‘lock up’ shares for a set time; however, IBKR has never called or forced buy in any of my ~10 shorts that I’ve done there over the last few years. But perhaps this will be a first?…the number of ATMU “shortable shares” decreased quickly from >200K two days ago to 50K shares this morning (3/1/2024).

        DT (or anyone else) – Has IBKR (or Fidelity) ever called or forced buy in any of your short positions there? Thanks.

      • Yes, this has happened to me. And can happen with any hard-to-borrow stock. It is always a risk. Also borrow costs (these change on a daily basis) might increase while you have a short position on.

        It does not matter whether it is IBRK, or Fidelity, or any other broker:
        – Broker lends you shares from someone and then you short-sell these.
        – If that ‘someone’ sells his position (and it moves to another broker) or makes the shares not eligible for lending, your broker needs to quickly find a replacement for the shares that were lent you.
        – If that replacement cannot be found, you will be forced to buy in and return the stock loan.

        Theoretically, the larger the broker, the lower the risk of forced buy in.

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      • Can you trade this in multiple brokerage accounts?

        If I have 3 different brokers, can I trade 99 share lots in each?

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    • Hi All, I am new to this site / and fairly new to Special Sits but I enjoyed reading the comments/the analysis on this CMI/ATMU deal. Snowbirdy, I want to humbly share the following thoughts on your trade set-up and to provide an alternative.

      By shorting well in advance (2/28) of the VWAP settings (3/7, 3/8, 3/11) you introduce (1) unnecessary extra stock borrow costs – an extra week or so (at .50-1% per week) and (2) rather than hedge the “long forward position” in ATMU (i.e expected receipt of 1200 shares per 99 CMI) as I suspect you intended, you dangerously left yourself short ATMU until the setting itself. That is, if ATMU rallies just 5% between your short and the VWAP then the PL is zero. You would be delivered shares at just a 2.5% % discount to your short sale, and the stock loan fee would be about 2.5% (assuming 3 weeks – March 18 or so to receive your shares and return to the stock loan sharks). Fortunately, the setting is happening now and the stock is roughly where it was on Feb28 so no more worries there but something to keep in mind for next time. In addition (and for completeness) the cost of funding the trade itself should be charged to the PL at say 5-5.5% for 3 weeks.

      As an alternative, I propose to create a short forward position with the options. While I agree with the author of this pitch that the options are expensive, but only if you are paying up for the vol (buying the ATMU put only), but if you also sell the call then the cost of the hedge works out to about .20-50 cents per atmu share (1-2 %). Furthermore, it “locks in” the stock borrow (as someone asked). So no risk of stock loan recall but with that peace of mind you do lose the flexibility of when to “return” your effective stock loan. In other words you have locked it in until the options expire. And you do run a small risk of assignment on the short call (so pick strikes accordingly). Note: As for which strikes / expiry to use? The March contracts are liquid but obviously this leaves a tight window for the deal to close. If you do think it takes as long as March 28 to receive your ATMU (I am betting it doesn’t) then the March expiry wont work for you.

      As for WHEN to put on the hedge. The later the better to avoid the risks of being on the wrong side of the VWAP setting. Perhaps brokers will accept a VWAP limit order? (no clue). The same goes for when to buy CMI. For the JNJ/KVUE deal in Aug (my virgin voyage with Spec Sits) I waited until after the VWAP settings and then got involved. For this ATMU trade I have a somewhat blended approach to the timing.

      Happy to discuss further, but I suspect I have long since overstayed my welcome at this party (as I often do). Good luck !!!!

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      • Hi Richard, thanks for this information! I agree that the March 28th, 2024 ATMU options seem reasonable.

        I’ll go long the put. What strike price do you recommend? For every 99 shares of CMI that you are long, how many option contracts did you buy?

        You mentioned that you shorted the call. What strike did you use there? Did you do the same amount of call contracts as put contracts? Thank you.

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      • Snowbirdy,

        Yes I sold the same amount of calls as puts U bought. Since I do not want to pay for the vol. have any risk (delta, gamma, vega) other than the deal risk itself. I am betting the March 22 (expiry) is good enough and sold the the 25 forward (sold call bought put). 11 contracts each for 99 shares of CMI (slightly underhedged). A synthetic short does not depend on the strike – so I just went with wherever the liquidity was. The expiry does matter. March 28 is “better” but I didnt like the lack if liquidity. cd not execute.

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      • sorry the the typo – I meant I sold the same amount of Calls as Puts I bought. BTW one thing to point out is strike choice does matter – but not because it has to be ATM to be a ” synthetic short” but rather, as you lower the strike you run the risk of early assignment on your short call – theoretically – if the borrow cost is very high – like now.

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    • The exchange ratio will be determined on the 11h of March and calculated using the VWAP prices of both companies during the 7-11th of March.

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  4. Has anyone been able to short shares of ATMU today (3/8/2024)?…if so, what broker did you use? Today I’ve tried Fidelity and IBKR, and neither has ATMU shares available to short. This morning is the first day that IBKR doesn’t have any ATMU available to short.

    My existing short position in ATMU (via IBKR) hasn’t been liquidated (by IBKR, yet?). For context, I’ve only shorted part of my CMI long position. Thanks.

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  5. So the ratio has been set and there’s still 9.4% spread for odd lotters?

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  6. With the exchange ratio fixed and IB showing borrow availability, I have opened a hedged CMI / ATMU trade this morning.

    Trade calculations:
    – Long CMI at $272;
    – Short ATMU at $24.21;
    – Exchange ratio 12.0298;
    – Number of ATMU shares to be received in exchange for 99 CMI shares = 1191;
    – Upside before borrow fees stands at $1900 (or +7.1%);
    – Borrow fees are at 55% currently – short position to be held for c. 1 week, so will consume approximately $300.
    – Total expected gain = $1600.
    – Deadline for tender submission at Interactive Brokers is Mar 13, 2024 13:00 EDT (other brokers might have different deadlines, some of which might have already passed).

    I am also bringing this CMI/ATMU split-off into the Tracking Portfolio.

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    • hi dt – for this trade why aren’t you buying ATMU put options (to hedge)? l am interested to learn why you see things differently from what Richard Owens (convincingly said he is doing…per his above comments)…Richard’s trade seems better, given that IBKR could liquidate your short at anytime. Thanks.

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      • There are various ways to play this.

        Put options are expensive and the premium paid would consume most of the upside. Simultaneously selling calls might work out in recouping some of it, but you put on risk that ATMU spikes upwards after expiration. Probably not very likely but still a risk. Also, I see very limited liquidity in ATMU put options and very wide bid/ask spread and only few trades a day.

        I might be forced to buy in on my short leg of the trade, but this time we are talking about a holding period of one week only, and with borrow available so close to the offer expiration, I think this risk is somewhat reduced (maybe that’s just a wishful thinking on my side).

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      • when you write “we are talking about a holding period of one week only”, is that something we know, or a guess based on previous similar situations?

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      • For the past split-offs, new shares have always been delivered within a week of the tender expiration, sometimes sooner. Having said that, it might be different this time, so there is no guarantee.

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    • dt – are you able to meet the tender deadline given a purchase today wouldn’t settle till maybe thursday?

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      • There is a guaranteed delivery clause, which allows to tender shares that have not yet settled.

  7. In this case, it sounds like it is legal/feasible to hedge the ATMU risk? Asking because other members have shown in previous tender offers that it is illegal to hedge the same stock – i.e. shorting DCBO in 1 acct with the same broker before tendering shares would yield 0 share position and no cash payment. Would the broker not look for ATMU shorts in this case?

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  8. You need to check the deadline for when you can tender CMI shares. As far as I’m aware of, the deadline for Schwab, Fidelity, Vanguard, and pretty much a lot of brokers have already passed. Only one broker can you do this right now, with certainty, with a deadline of 1 PM ET on March 13th, 2024: Interactive Brokers. If you don’t have an account there, it may be too late to open an account there (unless you deposit a crap-load of money). Do just buy the 99 shares and short the corresponding ATMU without tendering the CMI….

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      • You can tender the shares on the “Corporate Action Manager” page on IB. You can find it on the Support Center page.

  9. I purchased some shares in Interactive Broker’s website, but the “Choice Action” under the Corporate Action Manger section does not yet show anything for CMI. Does anyone happen to know how long it takes to show up after I’ve purchased? Alternatively, does anyone know if you can also call Interactive Brokers to tender? Thank you!

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  10. This might be a silly question, but can you have multiple accounts on IB or other brokers, and take advantage of this Odd Lot?

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  11. For those who won’t be able to open the short position (or don’t want to deal with the hedging risks), playing this unhedged is also a viable option. Historically, this strategy has been working very well and, on average, outperformed the “hedged” trade strategy.

    The main risk, however, is that ATMU’s free-float will increase by 5x following the split-off, which could put substantial selling pressure on the stock. For the unhedged trade to end-up in a loss, ATMU would have to drop by 10% from now to March 20 (around the time when the newly exchanged shares will become tradable). For what it’s worth, the historical data suggests that such scenario is unlikely. Out of the 19 split-offs over the last 10 years, only 3 cases saw its SplitCo share price falling in the period between the final ratio announcement and the new exchanged shares becoming tradable. In other 16 cases, SplitCo share price either stayed stable or went up by low/mid single digits.

    2 out of those 3 cases that saw a negative price movement were complete outliers that got hit by unlucky force-majeure events:

    – MMM/NEOG split-off arb in 2022 got hijacked by an unrelated bankruptcy court ruling for MMM. 3M Company had a massive class action lawsuit related to its combat earplugs and was trying to effect a stay on the lawsuit by bankrupting its subsidiary. The bankruptcy court blocked this move and the announcement came out during the final exchange ratio calculation period of the split-off. This triggered a downturn in both MMM and NEOG’s share prices, further impacted by the sharp general market sell-off during that period. Overall, NEOG’s share price declined by 15% from the final ratio announcement until the shares became sellable. However, the unhedged trade opened after final ratio announcement, would’ve still ended up at around breakeven (as the spread at the time also stood at 15%).
    – MCK/CHNG – this one was announced one month before the COVID outbreak in 2020 and both stocks were hit by a massive sell-off that followed. CHNG share price declined by 34% from the final ratio announcement until the shares became sellable and the trade resulted in 30% loss. However, clearly this is a complete outlier and is not comparable to CMI / ATMU situation today.
    – FTV/AIMC split-off in 2018. AIMC declined 2.7% since the final ratio announcement day. Nothing really happened and it seems this was just pure share price volatility. SPY was flat during that period.

    By the way, in all of these 3 cases SplitCo free float increased by 3x following the split-off.

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      • Yes. Hedged trades would’ve resulted in profit as hedging would’ve allowed to lock-in the spread outstanding at the time (after final ratio announcement).

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    • ATMU has moved up quite a lot over the last few days. Low float and short interest is massive. Is it getting squeezed? Would be great news for those who went unhedged. But for the hedged positions the risk is probably increasing.

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  12. Whatever borrow IB had seems to be gone now :(

    I actually had this trade on and ended up closing it last week as it did move substantially in my favor, and I didn’t want to risk getting bought in on the short or pay the borrow.

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  13. The borrow fee is now 73%. I was able to buy at 269.5 and short at 24.5 right after receiving the message from DT. This website is invaluable.

    At this stage, the deal will most likely be a smooth sailing, but the forced cover and borrow fee spikes are the main risks. Who knows, a lot of people probably did not play Docebo, but 20% was just too good a risk to take in a month.

    I calculated that my spread is around 9.15%, assuming the position needs to be held for 10 days, the borrow rate has to go to more than 330% for me to start losing money. Considering IB has the best availability of sortable shares, my opinion is that this is a favourable risk/reward.

    I recently bought a second hand car. The dealer said something I will never forget: when you buy a second hand car, remember it is a second hand car, not a new car. The same would be said of any arbitrage: it is an arbitrage, so there is always a possibility to lose a lot of money very fast. It is all about risk/reward.

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  14. DT or anyone knowledgeable – is it possible ATMU is added to the S&P 600 midcap index while tender is pending? I recall KVUE was added to the S&P 500 so it seems like a possibility, and perhaps a concern for those shorting ATMU naked.

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  15. Regarding this special sit, is getting a bit weird, right? ATMUS which its shorted in every broker until the last share (normal because there is not a big float) right now is skyrocketting. What are your thoughts on this?

    I fixed my ratio at 11.85, and the final one is 12.03, so it’s fine, but the financing cost is now 115%, and ATMUS is going higher and higher.

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  16. Yesterday I was making numbers on a synthetic short and the cost per day was less than shorting the stock. Im thinking that it was the best way for playing this.

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    • Hi Mazokie, have you done your synthetic short?…if so, what strike/date did you use? Thanks.

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      • Must be at the money, if not, its not a synthetic short. Must be when the price is near to one of the available strikes.

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      • That’s not really the definition of a synth short. It can be any strike.

        My ATMU synth is at 30 strike for example, and is April. Wanted some time value remaining on the put option if the payout arrived early.

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  17. yesterday morning shares to short were available but I didn’t want to go thru the hassle of monitoring for a buy-in. paid abt 80c for both sides combined (30c more than fair value due to wide spreads and buying the P and selling the C as a combined trade) for the MAR28 25 strike which put me short around 24.20 vs a 22.45 exchange value. Midpoint is about .60 this morning on the 26 meaning you could get short at 25.40 assuming how close you are able to trade to the midpoint. looks like the whole thing for me will end up a little over 6% all in

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    • Hi wlbsr, where (what broker) did you get the Put and Call? The bid-ask spread seems too wide on IBKR, unless you know of an exchange/broker/best time? that has narrower spread. Thanks!

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      • I see 3/28 $26 put ask is below $2. so net $24 for ATMU shares. ATMU share price is very strong today.

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      • Ibrok. I was buying a syn short as 1 trade because i would have screwed up legging in. went in on the low side and kept raising by 5c until it hit. so ATMU was at 24.50 and I was buying 25 strike. It should have been priced at 50c but I had to pay 80c. It was about 2x as expensive as paying 73% for a week or 1.4% of position in short fees. All the other side had to do was buy ATMU to offset my syn short. I guess 30c was a pretty good deal for the seller of the syn short. I would think you could buy the 26 at 60c or so which would put you short at 25.55ish

      • This also depends on how much it costs to get out. another 30c to get out will knock it down to about a 4% return. If the price on ATMU moves well away from 25 then I can stay and either exercise the put or assume that I will be exercised on the short call which will gets me out of the hedge for free. Still scratching my head on what happens if ATMU stays close to 25.

      • costs nothing to get out, you let it expire and assigned the short.

      • I wish this had an edit button. correcting a previous statement. whoever sold the synthetic short to me would have to short the shares to hedge and thus the amount over fair value. I guess they figured the cost and risk to short for a week is 30-40c over fair/intrinsic value.

  18. I apologize if this question is ignorant, but if you’ve shorted ATMU as part of your strategy related to the CMI/ATMU split-off, and ATMU’s share price skyrockets after the tender offer is completed, is there not a risk that you could face potentially unlimited losses on your short position?

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      • I see. Thank you for clarifying. So, if one were to short ATMU, should they short the expected amount of share to receive (1191), or the equivalent dollar value that they are long on CMI?

      • You should short the amount of ATMU you’ll receive. Not being rude but if this is not obvious to you, you should probably not have this trade on in the first place

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      • To be more constructive, there is a real question as to what proportion of ATMU to short as there is a cost associated with hedging as well as some small (but non zero proba) risks: what if the odd-lot provision gets cancelled, what if the exchange offer itself gets cancelled, what if you get bought-in on your ATMU short at a much higher level etc…
        It’s really a matter of judgment on your side to decide how comfortable you are with those risks and the cost associated with hedging. Personally (note this is not a recommendation or advice) I’ve shorted c50% of the 1191 ATMU shares.

        But whilst the proportion to short is debatable, the “clean”, theoretical arb is definitely achieved through shorting 1191 ATMU

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  19. Something is happening, Interactive brokers has raised the maintenance margin by 100% this morning

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      • IBKR is showing already ATMU.REC as a position with the right amount of shares, so probably beginning of next week is about right.

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    • I don’t recall 50% of shares being tendered for a company this large, do you? That seems unusually high.

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      • I don’t think it’s unusual. Participation even in many times larger companies (e.g. DHR/NVST, LLY/ELAN, CBS/ETM) was also around 50%. I think it’s because many institutional shareholders would choose to participate in the exchange in order to keep their % ownership stakes in the company unchanged, and also to generate +7.5% on the portion of shares that are accepted in the tender.

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  20. Also, about 50% of all tendered is via guaranteed delivery, which probably means tendered by institutions who waited till the last day to tender. Having said this, I don’t know what significance if any, of this to us.

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    • actually it means the tendered shares were not settled so purchased in the last day or two. Settled shares being tendered on the last day would not be under guaranteed delivery

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      • 37m tendered by guaranteed delivery. Last 2 days volume is less = 22m.

        …… 69,142,112 shares of Cummins common stock were validly tendered and not properly withdrawn, including 36,902,099 shares that were tendered by notice of guaranteed delivery and 1,006,609 shares that tendered in aggregate by “odd-lot” shareholders (holders of fewer than 100 shares) not subject to proration. Cummins intends to accept 5,574,050 of the tendered shares in exchange for the 67,054,726 shares of Atmus common stock owned by Cummins.

        Date Open High Low Close Adj Close Volume
        Mar 14, 2024 263.51 267.36 260.88 263.58 263.58 6,333,900
        Mar 13, 2024 270.61 274.20 267.33 270.24 270.24 9,590,600
        Mar 12, 2024 272.33 272.64 268.37 269.77 269.77 12,659,200
        Mar 11, 2024 270.61 271.48 265.42 270.15 270.15 18,342,800
        Mar 8, 2024 267.34 273.19 266.96 268.60 268.60 11,174,000
        Mar 7, 2024 273.09 276.92 264.61 266.21 266.21 11,888,100

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      • A lot of times odd lots are excluded from volume numbers, not sure what your source is but it could possibly be that real volume is a lot higher if you include those odd lot trades as well

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  21. As of now (Monday, 3/18/2024 @ 10amET), IBKR has borrow availability of 180,000 ATMU shares. I sold short more ATMU so that as of today I am fully hedged. Happy it reappeared!…because I wasn’t able to find any availability (via IBKR or Fidelity) the last two trading days: Thursday (3/14/2024) and Friday (3/15/2024).

    For anyone who did this in JPMorgan Self-Directed, they messed up my tender by telling me the wrong cutoff date/time (thus, I submitted the tender too late)…therefore, I’m hesitant to use JPMorgan again for tenders. Does anyone have a list of U.S. brokers (besides JPMorgan, Fidelity, and Chase) that it is free “no charge” to do this type of tender?…I did a Google Search and didn’t see a comprehensive list. Thanks!

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  22. One of my brokers told me that Wedbush said ATMU shares should be delivered today – could be after the close

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  23. Fidelity, TD Ameritrade (maybe Schwab too), probably others by now have allocated shares to accounts.

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    • Hi MS212 – I received in Fidelity only (not Schwab)….if anyone has received their ATMU shares on Schwab as of right now (1pm ET on Tuesday, 3/19/2024), please let me know. Thanks!

      Reply
  24. I thought Schwab would have hit since they own TD, but it appears those back offices are still separately run for now. Based on the stock move since 2pm I think another broker allocated shares but I’m not sure which one.

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  25. Interactive shares hit my acct so I imagine borrow cost is gonna drop and price may get whacked

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  26. unwound the synthetic short (sold put and bought the call back) at 10c less than where I sold the underlying ATMU. cost 30c on the inbound but made back 10c on the outbound. Net was probably not significantly more than shorting and paying the borrow fees. looking back, any idea how being assigned on the short call a few days before getting the underlying ATMU shares would have played out?

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    • I assume they will be doing the allocation overnight .

      Just asking if anyone at Etrade got their shares or are you in the same boat

      Reply
  27. The results of this trade are $1400 for hedged trades and $4000 for unhedged positions. Calculations are below. In line with historical stats, unhedged strategy delivered materially higher gains.

    Hedged odd-lot positions (which is what I did):
    – Long 99 CMI at $272/share
    – Short 1191 ATMU at $24.21/share
    – Gain from Long/Short = $1900. Both positions were eliminated upon the exchange.
    – Less borrow fees of $500
    – Total gain = $1400

    Unhedged odd-lot positions (which has historically delivered better returns):
    – Long 99 CMI $272/share
    – Long 99 CMI gets exchanged to 1191 ATMU.
    – ATMU sold at $26/share
    – Total gain = $4000

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    • Crazy price action this morn. The bots having a field day with this .

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  28. Would it generally be a good strategy to buy put options once ATMU shares are delivered? I understand that the share price should fall starting today, but looking at the DD/IFF case, I see that the price of IFF went up after the share delivery. What was the reason for this increase? Thank you!

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  29. Waiting until the last minute (3/13 midday) worked a little better – bought 99 CMI at 271.5 and sold short an equivalent dollar amount of ATMU which was 1045 shares- lost $534.5 on the short/CMI decline in price and paid only $227.50 on the borrow for 4 days. Now have $3809 of ATMU so about 3K if I have it right. I didn’t realize that it does take some time for the corporate action tab to show up after you buy on IB. It took 35 minutes but I have since read it can take up to 2 hours which would have put me past the deadline.

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  30. Proud to be a member of the sold too soon club

    I knew it was bad form to sell into the flurry of knee jerk bailers , but did it anyhow, too much profit on the line

    Now its $1 higher . Even when you make money in this game, you feel stupid

    lol

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    • Haha, I feel the same way. The pain of not having won more is greater than the joy of having won a lot. I feel as if I had lost money, but one must stay cool and stick to the strategy.

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      • I usually keep upside, but it rarely has paid off. I figured, lets take it off, wait for the fed announce, and then trade back into it after it settles.

        Got away .

        29 now. damn

        Hey , think of all the hedgers who paid borrow and shorted in the 24’s . They must be thrilled.

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  31. Bought CMI at $270.5 and sold ATMU short for $26.38 on eTrade. Thanks for sharing this great opportunity, dt!

    Anyone have hypotheses on why ATMU appreciated so much after the split-off?

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  32. Longs getting greedy after short squeeze played out, and orphan holders love their orphans all of a sudden.

    Good question, anyone have realistic thoughts?

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    • My thought is , I should have taken my f***** hands off the keyboard

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  33. Seriously, there should be a support group for those who knee jerk sold this at first op.

    Might be the dumbest thing I ever did.

    The profit made is not making me feel better.

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    • That’s what happens if you own a large position in a short-term trade and don’t do fundamental due diligence. I’m not even trying to diss you, it’s simply how it is. Either you have a firm opinion about the valuation of the company beforehand or you sell quickly – otherwise you are just gambling. Selling was not a dumb decision – that’s result oriented thinking. Nobody here (me included) was eager to go long ATMU when it was trading at $22 a few weeks ago. Now it’s up but what’s the point in complaining. Other split-offs cratered after the split. IFF is down ~50% two years later if that makes you feel good. But what’s the point of looking at those graphs if you don’t have a firm opinion about these companies.

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      • Well said writser. It was not at all a dumb decision to sell, it would have been a dumb decision to hang on to the stock after the special situation trade played out without a well-researched, sound decision made to hold the stock for either a fundamental reason or a new, distinct special situation oriented reason.

        Every single day, you could pick up the sports section of the newspaper, look at the box score and say to oneself, “The Red Sox won….I knew I should have bet on them.” Every single day, teams are going to win and lose, that doesn’t make them good or bad bets before-the-fact. Every single day stocks are going to go up and down, that doesn’t make them good or bad before-the-fact speculations.

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  34. I trade this CMI/ATMU tender buying a limited number of CMIs followed by an ATMU short at an hedged price. Despite the high interest requested by IBRK for the short, the whole transaction generated a reasonable P&L. My issue is that after several inquiries, I have not been able to trace the P&L in my USD_CASH balance. I am rather skilled with the complex IBRK Statements & FLex queries, so am I am pretty sure about my concerns. The subject has been escalated since more than a month through the IBRK Secure Message Center which after some dummy replies, just recently confirmed the issue and moved it upwards it to an upper investigation level. Did any body face the same problem?. Are you sure your P&L was properly debited in your account?. Any help will be appreciated. Regards.

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    • What lines do you see under the “Corporate Actions” heading when you run an “Activity Statement” around 19th March? There should be 2 lines showing your odd-lot tender and your receipt of 1190.95 ATMU shares

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  35. Emmanuel, thank you for your reply. The Corpororate Actions show the following :
    Report Date Date/Time Description Quantity Proceeds Value Realized P/L Code
    Stocks
    USD
    2024-03-13 2024-03-13, 19:45:00 CMI(US2310211063) Tendered to US231992ODD3 1 FOR 1 (CMI, CUMMINS INC, US2310211063) -50 0.00 0.00 0.00
    2024-03-13 2024-03-13, 19:45:00 CMI(US2310211063) Tendered to US231992ODD3 1 FOR 1 (CMI.ODD, CUMMINS INC – TENDER ODD LOT, US231992ODD3) 50 0.00 0.00 0.00
    2024-03-19 2024-03-18, 20:25:00 CMI.ODD(US231992ODD3) Merged(Voluntary Offer Allocation) WITH US04956D1072 60149 FOR 5000 (ATMU, ATMUS FILTRATION TECHNOLOGIE, US04956D1072) 601.49 0.00 15,638.74 474.86
    2024-03-19 2024-03-18, 20:25:00 CMI.ODD(US231992ODD3) Merged(Voluntary Offer Allocation) WITH US04956D1072 60149 FOR 5000 (CMI.ODD, CUMMINS INC – TENDER ODD LOT, US231992ODD3) -50 0.00 -14,306.00 0.00
    Total 0.00 1,332.74 474.86
    So, almost $475 gain for 50 CMI shares.
    (sorry for so much unsorted garbage, I can’t do better with the dummy paste).
    The USD_CASH doesn’t show up any similar amount around the dates you suggested while I was able to trace all trades day by day. A kind customer service lady looked into that with the same conclusion and she is currently escalating the issue. Any further ideas?. MANY THANKS.

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    • Frankly I don’t think you understand what is happening at all. The tender was a stock for stock deal. The deal generates no changes in your cash balance whatsoever. The actual profit (and cash) the deal generated is the difference between what you spent on CMI shares and what you received when you sold your ATMU shares. There is no such thing as PnL being “deposited” in your account. You should probably stop bothering those poor helpdesk people.

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    • Yes writser is correct, based on those lines in your Corporate Actions statement, the event was processed correctly, the PnL was generated when you received your ATMU shares for your CMI shares and this netted off your existing short ATMU.

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