Merrill sale still seems shaky to some

By Elinor Comlay

NEW YORK (Reuters) - Some investors still can't believe that Bank of America's (BAC.N) deal to buy Merrill Lynch & Co Inc MER.N is going through.

The spread between Merrill's share price and the implied price of its shares under the deal's terms has been wide, which has some investors thinking Bank of America could want to renegotiate the price.

Others think the U.S. Securities and Exchange Commission's ban on shorting financial shares could be at fault because it has widened the spread on all financial deals.

Since hedge funds can't sell shares short in either Bank of America or Merrill, it may be misleading to interpret the wide spread as a sign that investors doubt the deal will go through.

"Banning the ability to short is messing up what arbs would usually take care of in an efficient market," said Jon Fisher, portfolio manager at Fifth Third Asset Management in Cincinnati.

This is because typically hedge funds such as merger arbitrageurs and other investors look to profit from their expected outcome of the deal by buying shares in the company being acquired and selling shares short in the buyer.

On Tuesday, even after the market bounced back from Monday's rout, the difference between the price of shares in Merrill and their value implied by Bank of America's offer was a little over 16 percent, after pulling as close as 5 percent last week.

Spreads above 10 percent typically indicate significant uncertainty about a deal but in the present climate lots of target companies are trading at substantial discounts to implied bid prices. Of 37 deals whose spreads are regularly monitored by Reuters, more than half are over 10 percent.