For all the posturing and the public relations surrounding the First Union-Wachovia-SunTrust saga, there has been a relatively quiet consensus building in the market regarding the outcome.

This is not to say Wall Street has picked the winner in the battle, just that the people who make their living in the risk arbitrage corner of the trading world are pretty certain that whoever does win is going to have to toss in some additional compensation.

This is not idle speculation. The trading that takes place after stock deals are announced can produce some breathtaking market activity. In the weeks prior to the merger between U.S. Bancorp and Firstar Corp., for example, New York Stock Exchange data showed that short positions in Firstar totaled more than 33 million shares, massive positions but hardly uncommon in merger arbitrage situations.

Often the price changes involved are minute. There are instances, though, where the trading gets interesting

A flurry of stock-for-stock transactions in financial services has given arbitrageurs plenty of opportunity to ply their trade. Their job is to constantly assess the likelihood of (and length of time it will take for) a deal to reach completion and seize on disparities in the value of the companies over that period.

One situation that has gathered some attention is U.S. Bancorp’s bid for the payments processor Nova Corp. U.S. Bancorp — in a surprise coming as it did fresh off the Firstar merger — announced on May 8 a $2.1 billion blended offer of 60% in a $31 per share in cash component and the rest to be paid with the equivalent of $31 a share in stock. Nova quickly rallied to above $30 a share, and the speculation commenced.

“There has been a lot of talk in the marketplace about a possible competing bid, either from another bank or processing company,” said one trader, who like many involved in arbitrage asked not to be identified when talking about specific situations.

Despite the chatter, Nova stock just as quickly settled into a trading range that suggests “arbs haven’t bought into the story,” the trader said. Nova was right around $30 on Friday, and with the deal scheduled to close at the end of the third quarter, the return on an annualized basis is at a healthy 13%.

In a second situation, Credit Suisse First Boston’s bid to take its CSFBdirect unit private through a purchase of the 17% of the shares it doesn’t already own, the response has been angry. Investors blistered the deal (a Wall Street Journal article quoted one analyst as calling it “a slap in the face”) but bid the stock above the $4-a-share offer

This is a situation where CSFB seems to hold all the cards; no other bidder is likely to emerge for the online trading operation, and CSFB is under no obligation to raise its offer. Still, with many investors facing steep losses on CSFBdirect, which like other online brokerage stocks has tumbled over the last year and a half, the guess is that CSFB will boost its offer if only to dodge a public relations fiasco, said one arbitrageur.

Contrast those two situations with what has happened since First Union Corp. announced its agreement to merge with Wachovia Corp. The subsequent hostile offer by SunTrust quickly took over as the dominant force in the stock market — shares of Wachovia have held to levels just a hair below SunTrust’s offer.

That has several implications. For one thing, “with Wachovia trading off SunTrust, it means people are using SunTrust as the acquirer,” the trader said. Wachovia shares were trading Friday at around $65.50, a price well above the suggested value of First Union’s $62-per-share offer, based on the two-for-one ratio in the agreement.

But traders have gone one step farther. Bidding Wachovia so close to SunTrust’s offer provides just half the return implied by the U.S. Bancorp-Nova deal, which by definition should seem the more secure, and therefore lower-yielding trade. That kind of behavior only makes sense if a higher bid is viewed as a relative certainty.

Executives at both SunTrust and First Union are certainly aware of this, and their comments in recent days reflect efforts to keep expectations in check. First Union chairman and chief executive G. Kennedy “We are very committed to this deal” Thompson has steadfastly kept his message focused on strategy and integration while avoiding talk of — but never formally ruling out — a higher bid.

Likewise SunTrust chairman L. Phillip “This is not December” Humann made no effort to be friendly to Wachovia, instead doing everything he could to cast SunTrust’s bid as a poorer one than investors would have gotten had the two sides reached an amicable deal. That talk, clearly aimed at alienating Wachovia shareholders from the board, also had the effect of hinting that SunTrust had not gone as high as it could have.

The lack of an overwhelmingly superior “bear-hug” offer spurred talk on Wall Street that a third bidder might surface. But, here too, the dollars failed to follow the gossip.

In part, that’s because the arguments made against SunTrust’s entry — hostiles rarely work, bidding wars are destructive — are now doubly true. In part, that’s because some of the candidates, like Wells Fargo’s Richard “We don’t do hostile deals” Kovacevich, have ostensibly taken themselves out of the running. Also, Wachovia has chosen its white knight, having aligned itself with First Union, a friendly partner, albeit one without the deepest pockets in the industry.

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