Introduction to Merger Arbitrage Mondays

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March 15, 2010 | Merger Arbitrage | | Author Asif

We are introducing a new service on SINLetter called Merger Arbitrage Mondays to highlight merger arbitrage opportunities that exist in acquisitions that are yet to be completed. If you are not familiar with merger or risk arbitrage, you can read about it in a section of the March 2009 investment newsletter titled Merger Arbitrage and the Pfizer-Wyeth Deal. That deal delivered gains of 27.34% including dividends over a 7.5 month period. On an annualized basis gains were 43.77%.

I currently have a position in network equipment maker 3Com (COMS) in my personal portfolio as a merger arbitrage play on Hewlett Packard (HPQ) completing the acquisition of 3Com at some point during the first half of 2010. As mentioned in this tweet, the spread offered by this deal in early February when I sent the tweet was 5.89% or 14.725% annualized even if the deal closed as late as 6/30/2010. The spread has narrowed considerably since then as 3Com’s stock has risen to $7.74 and is now very close to the $7.90 a share that HP has offered to acquire 3Com.

The goal of Merger Arbitrage Mondays is to present all the merger opportunities out there along with their calculated absolute returns and annualized returns. We started working on this at the start of this year and hence deals announced prior to 1/1/2010 (like the HP-3COM deal) are not included in the table below. Once we build out this Merger Arbitrage service with features like an automatically updating portfolio of Merger Arbitrage opportunities accessible at any time,  we will roll it into the Special Reports service to provide better value for subscribers who now only get reports once a quarter. Until then Merger Arbitrage Mondays will be free for everyone.

Symbol Announced

Date

Acquiring

Company

Closing Value Closing

Price

Last Price Closing

Date

Profit Annualized Profit
+ SSE 2/23/2010 Naugatuck Valley Financial Corp $19.5 million $7.25 $6.56 8/16/10 10.52% 25.43%
+ SWWC 3/3/2010 Institutional Investors $275 million $11.00 $10.44 5/17/10 5.36% 31.58%
+ SII 2/19/2010 Schlumberger $7.5 billion $45.84 $43.59 9/30/10 5.16% 9.66%
+ PINN 2/24/2010 Investor Group lead by Scotia Waterous (USA) $11 million $0.34 $0.33 5/17/10 3.03% 17.84%
+ BNE 2/24/2010 RR Donnelley $481 million $11.50 $11.25 9/30/10 2.22% 4.16%
+ MIL 3/1/2010 Merck $6 billion $107.00 $105.26 9/30/10 1.65% 3.09%
+ ADG 1/19/2010 Chemring Group Plc $59 million $7.25 $7.16 4/19/10 1.26% 13.49%
+ SKIL 2/12/2010 consortium of private equity funds $1.1 billion $10.80 $10.71 5/31/10 0.84% 4.04%
+ LGN 1/22/2010 Lone Star Funds $270 million $2.50 $2.48 5/17/10 0.81% 4.75%
+ IUSA 3/8/2010 CCMP $460 million $8.00 $7.94 6/30/10 0.76% 2.63%
+ RISK 3/1/2010 MSCI $1.55 billion $22.40 $22.25 7/16/10 0.67% 2.03%
+ ZRBA 1/11/2010 Woodstream Corp $23 million $9.00 $8.95 3/31/10 0.56% 12.74%
+ CITP 2/2/2010 Manpower $375.8 million $17.65 $17.56 4/2/10 0.51% 11.00%
+ CFL 1/18/2010 Tyco International $2.9 billion $42.50 $42.30 6/26/10 0.47% 1.71%
+ KTII 1/11/2010 Hillenbrand Inc Common Stock $435 million $150.00 $149.66 3/31/10 0.23% 5.18%
+ TRA 3/12/2010 CF Industries Holdings, Inc. more than $4.6 billion $46.37 $46.33 4/12/10 0.08% 1.11%
+ BARE 1/14/2010 Shiseido $1.7 billion $18.20 $18.19 3/31/10 0.05% 1.25%
+ FACT 3/9/2010 Abbot $450 million $27.00 $27.01 5/17/10 -0.04% -0.22%
+ PRPX 2/17/2010 L.B. Foster Co. $112 million $11.71 $11.74 6/30/10 -0.26% -0.89%
+ HDIX 2/3/2010 Nipro Corporation $215 million $11.50 $11.53 3/31/10 -0.26% -5.94%
+ ZNT 2/18/2010 Fairfax Financial Holdings $I.4 billion $38.00 $38.25 5/17/10 -0.65% -3.85%
+ RCNI 3/5/2010 Abry $1.2 billion $15.00 $15.32 9/30/10 -2.09% -3.91%
+ CKR 3/1/2010 Thomas H. Lee $928 million $11.05 $11.47 5/17/10 -3.66% -21.56%
+ PIII 2/18/2010 Lineage $16.7 million $5.26 $5.75 5/17/10 -8.52% -50.17%
+ JSDA 3/9/2010 Reeds Inc. $9.7 million $0.40 $0.56 -28.57%
+ AYE 2/11/2010 FirstEnergy $8.5 billion $15.49 $23.28 3/31/11 -33.46% -32.48%
+ CCE 2/25/2010 The Coca-Cola Company $12.3 billion $27.01 10/1/2010

Please note that Merger Arbitrage is also referred to as Risk Arbitrage for a reason. These deals do fall apart from time to time and there is no free lunch while investing. We have attempted to reduce the amount of work you have to do to identify interesting deals but we strongly recommend doing your own research and consulting with your broker/investment adviser before taking any action. We do not warrant the completeness or accuracy of the content or data provided in this Merger Arbitrage service.




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Comments

  1. Kartick Narayan
    March 15th, 2010

    This is great. Do you have any advice on how to set up the actual trades based on the above information?

    Is your recommendation ultimately to 1) buy and hold or 2) buy now and sell immediately after deal is close (provided of course, the stock is trading below the offer price) or 3) It depends on which stock we are talking about.

    Thanks!

  2. Asif
    March 15th, 2010

    It is actually as simple as buying the stock like you would any other stock and holding through the closing. Watch for slippage costs (trading fees, etc..) because the spreads can sometimes be narrow. You should try to figure out the probability of the deal closing and the downside risk should the deal fall through.

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