Zhitong Finance learned that merger and acquisition arbitrage experts said that if the $8.5 billion merger deal between luxury goods company Versace and Michael Kors parent company Capri (CPR.US) and Coach's parent company Tapestry (TPR.US) is not successfully completed, the company's stock price may drop by about 30% or more.

Earlier, the US Federal Trade Commission (FTC) filed a lawsuit on Monday to prevent Tapestry from acquiring its rival in the fashion industry, saying it would eliminate “direct head-to-head competition” between the two luxury handbag maker's flagship brands. Several antitrust lawyers said that the FTC's rare antitrust challenge against a high-end fashion merger could set a precedent for luxury trade regulation.

The FTC said in a statement that the merged company will have around 33,000 employees worldwide and may reduce wages and employee benefits. “The proposed merger could strip Tapestry and Capri of competition in price, discounts and promotions, innovation, design, marketing and advertising, leaving millions of American consumers unable to benefit from Tapestry and Capri's head-on competition,” the FTC said.

For merger arbitrage traders, the challenge is figuring out which party will have the upper hand in court; the results may not be known until several months. On Wednesday, Capri's shares fell for the third day in a row. Since Monday's close, the stock has fallen about 6%, and finally traded at around $35.50, far below the purchase offer of $57 per share. The stock was close to $35 before the merger was announced in August.

The results reported by Capri over the past two quarters were disappointing, which further complicated traders' views. The agency's survey of 20 M&A experts showed that if the deal fails, Capri's share price could fall to around $20 or less, 30% or more below current levels. The potential price drop reflects the respondents' views on the stock's value before the end of the year, and some respondents expect to have a clearer understanding of the fate of the merger at that time.

Since announcing results in August, Capri, which owns brands such as Michael Kors and Versace, has twice reported lower-than-expected earnings, which has raised concerns about its results for the next few quarters. The company's next earnings report will be released in May. Tapestry has brands such as Coach, Kate Spade, and Stuart Weitzman.

Brian Lombardi, M&A arbitrage strategist at FBN Securities, said: “Capri's breakout price is a moving target, which makes the judgment more complicated when there is a long time left in the transaction.”

For him, the potential drop is around $22, but he believes the two companies' chances of winning in court are declining according to the FTC indictment and the signs in its statement. For M&A arbitrage traders, determining a fall in stock prices is key because they want to profit by betting on the possibility that the deal will be completed while monitoring the performance of the company concerned. In the recent Microsoft (MSFT.US) deal to acquire Activision Blizzard (ATVI.US), traders are betting that the stock price will fall further, partly because the outside world is optimistic about the target business.

In the survey, 12 respondents believed Capri's decline ranged from $20 to $25, depending on indicators such as expected earnings per share and price-earnings ratio. Some respondents lowered their expectations on Tuesday. Earlier, however, Kering SA (Kering SA) of its biggest brand, Gucci, warned that profits would decline in the first half of this year, indicating that the prospects for consumer spending on luxury goods are bleak. Four respondents thought the breakout price would be higher, rising from $26 to $30, and two others thought it would be as high as $33. Two respondents are far more pessimistic and expect the price to drop to a dozen dollars.