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USA Interactive is key stock if trading EXPE, ROOM or TMCS

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My e-mail has been inundated with questions regarding the technicals and recent bearish profile of Expedia (NASDAQ:EXPE) $70.08 -0.96% from last week. To try and "kill three birds with one stone" it should be understood the near-term action in Expedia (NASDAQ:EXPE), Hotels.com (NASDAQ:ROOM) $47.01 -1.05% and Ticketmaster (NASDAQ:TMCS) $21.02 -0.23% will most likely depend on how USA Interactive (NASDAQ:USAI) $26.07 -0.45% trades.

As such, a trader should still monitor any underlying positions in EXPE, ROOM and TMCS, but close attention should be made to USAI.

As reported June 3rd, USA Interactive (USAI) made an unsolicited $4.5 billion bid for portions of its publicly traded units (EXPE, ROOM and TMCS) that it did not already own. At the time, USAI's CEO Barry Diller was offering each subsidiary a 7.5% premium over the previous day's closing prices.

What this has "done" in essence, is tied the price action of EXPE, ROOM and TMCS to how USAI trades. A technician that pulls up the bar charts of these four stocks will immediately see that this looks to be apparent and arbitrage traders have brought all four stocks basically "in line" with each other based on the recently proposed merger back into USAI.

USA Interactive Chart - Daily Interval

The MARKET's initial reaction to the June 3rd merger news from USAI was negative and had shares of USAI under some heavy selling pressure. On June 5th (two session after merger offer) USAI said that the negative market response had precluded a quick process of a stock merger and therefore USAI would not commence any exchange offers in the near future and that USAI had no intention of increasing the conversion ratios.

Sometimes, when a company makes at stock merger offer (USAI in this case) sees its stock decline after an offer, it will increase its conversion ratios, to still make the "deal" attractive and acceptable by the shareholders that the offer was made to (EXPE, ROOM and TMCS in this case). However, as noted above, USAI said it would not offer any type of increased conversion ratio.

For now, the MARKET trades the stocks as if the deal is going through, and as such, it is expected that all four stocks will most likely "mimic" the trading in USAI.

Trying to think like a hedge fund manager, I would think that a hedge fund would actually prefer to be short/put EXPE, ROOM or TMCS under current conditions, while hedged against a bullish position in USAI.

You're correct. Under that scenario, a trader may actually be 50/50 if equally dollar weight in short $33.33 in each of the three EXPE, ROOM and TMCS while long $99.99 in USAI.

Bearish traders in EXPE, ROOM and TMCS will then want to monitor USAI going forward. As long as the "deal" holds together, then it would be expected that EXPE, ROOM and TMCS trade in unison to USAI.

The "kicker" for a bear in EXPE, ROOM and TMCS would come if USAI were to fall further from current levels, or potentially the deal falls through.

The "reason" the deal falling through might be a positive for a bearish trader in EXPE, ROOM and TMCS might be that the MARKET feels USAI was paying too much in its offer.

Near-term, traders not holding any position in any of these stocks may want to look for any DIVERGENCE between these stocks. For instance, should we see abnormal weakness in EXPE, ROOM or TMCS as opposed to strength in USAI, it may well be a hint that the MARKET believes the previously announced deal may be having difficulty being completed.

Jeff Bailey
Senior Market Technician
Option Investor

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