shire. Thus, the liquidity of the stocks involved increases the execution risk
and caused the inefficiency.
We now apply the theory to the INTC–LEVL example discussed in
Chapter 10. Figures 11.5a and b are plots of the spread and the probability
implied by the spread as of the close. The initial probability is determined as
the percentage by which the spread narrows on deal announcement with re-
spect to the spread calculated on the 10-day average prices of the securities.
In this case it turns out to be close to 30 percent; that is, the spread narrowed
by about 70 percent on deal announcement. Note that the probabilities cal-
culated follow the spread values very closely. This results in a very noisy
picture. It is conceivable that the probabilities do not vary as much. It is
therefore useful to use some smoothing function on the spread before eval-
uating the implied probabilities. We will discuss this in greater detail in
Chapter 12.
The Market Implied Merger Probability 183
FIGURE 11.5A Spread (INTC-LEVL).02040 60 80 100 1200Spread
12345FIGURE 11.5B Probability of Deal Break (INTC-LEVL).02040 60 80 100 1200.0Probability0.10.20.3