The Danger of Overcomplication
Sometimes the pen is mightier than Excel- and over-complicating problems can just make things worse. Stick to the basics and magic happens!
Recently, I was asked about DWAC- the company merging with Trump’s “media” company. I knew about this transaction, but stayed away because the company was being valued at $15B and had revenue of $0. But, I was asked to look at this weird deal- so why not!
The general idea:
Stock = $95
Warrant to buy stock at $11.50 = $26
Warrants should be $83.50 ($95-$11.50)
Or stock should be $37.50 ($26+$11.50)
You should be able to short the stock and buy the warrants, which would provide a 150%+ return as the stock and warrants hit parity (hint: it’s never that easy). Not too shabby. I wrote the idea out, and created a spreadsheet that would show different payoffs depending on:
Confidence of the merger closing
Timing of merger close
Cost to short the stock (to short, you borrow shares and pay interest)
After an hour or two, I looked at my overly-complicated spreadsheet and felt confident I had the answer. As I went to my friend to show the results- I noticed something wrong. One of the return figures seemed off. This threw the entire output off the rails. However, my overly-complicated spreadsheet was so convoluted- I could not find the mistake!
Like a caveman, I shamefully went to my notebook to write out the trade by hand. Stock price- check. Warrant price- check. Time to close the merger- check. Cost to short the stock- also check.
After about 5 minutes- I had my answer.. There was no need to have a complicated spreadsheet- all I needed was a pen, napkin, and some sense.
Complicating things is not necessary. Maybe overly-complicated spreadsheets made me feel smarter, but so what? The pen is mightier than Excel! I got so caught up in acting smart with overly-complicated spreadsheets- I completely forgot that it didn't matter if I was smart or not- all that matters is if I can solve the problem!
Drop excel and pick up the pen!