This is the weekly Merger Arbitrage Performance Review – November 8, 2020. This report focusses on ACIA, VRTU, PNM & CBB arbitrage spreads during the period 2nd November – 6th November. These stocks are selected from the top 20 investable US cash based merger spreads, a list of the largest pending cash merger arbitrage spreads available as at 1st November compiled by Merger Arbitrage Limited. Investors and traders can follow our latest Top 20 (T20) list each week here. Regular followers will already be familiar with our rules for inclusion on the T20 Index.
Following the performance table of investment returns, the first section of this report compares and reviews the performance of the broader market with the MNA. Then we more specifically discuss the performance of the overall T20 Index. The next sections detail the biggest winners & losers from the T20 portfolio followed by the conclusion. The information contained in this weekly Merger Arbitrage Performance Review – November 8, 2020 assists traders in making merger arbitrage investments and event driven trading decisions. Click this link for the archive of spread performance reviews from previous weeks.
Additional live news updates for these deals can be found on our customized T20 Index news feed. Even more specific merger details & news can be found on the dedicated news and merger factsheet pages including popular deals such as DNKN, IPHI–MRVL, AMD–XLNX, PXD–PE, COP–CXO, FIT & TIF.
Table of Returns
Merger Arbitrage Performance Review - November 8, 2020
| Merger Arbitrage Limited | The Market | ||
|---|---|---|---|
| Product | Weekly Change | Product | Weekly Change |
| T20 Index | 0.15% | SPY | 7.18% |
| Index Dispersion | 0.57% | VIX | 34.61% |
| Winners | 13 | MNA | 0.58% |
| Losers | 2 | ||
Market Performance Review
Right on cue, following last week’s extensive losses causing some market participants to re-examine their outlook for the U.S. economy the markets stage what can simply be most accurately described as a “comeback”.
What the markets were hoping for is a split in the balance of power so as to restrict changes to legislation regarding environmental controls and a continuing of the current tax regime. As the republicans were set to keep control of the Senate, this would require the election of a Democratic President. This also increases the chances of an attractive domestic economic stimulus package.
This is exactly what the markets have got, and as such, the political trading witnessed last week will have a number of traders giving themselves a well deserved pat on the back.
In slightly less exciting news, the enconomy added more jobs than expected although we are still waiting to see hoe the recent rise in Covid cases will effect the economy.
By the close on Friday, the SPDR S&P 500 ETF (SPY) index fund was higher by 7.18%. This sharp movement naturally caused the VIX to collapse and by Friday was lower by 34.61%. The IQ Merger Arbitrage ETF (MNA) performed well, helped by stock swap deals which remain unhedged (directly) in the portfolio. This positive performance was largely due to the rise in Maxim Integrated Products (MXIM), Grubhub (GRUB) and Netent (NET-B.ST). By the close on Friday, the IQ Merger Arbitrage ETF was up by 0.58%.
Merger Arbitrage Portfolio Performance Review
Cash merger arbitrage spreads as measured by the Merger Arbitrage Limited T20 Index also produced a positive performance this week. However, a somewhat subdued performance across the index does warrant closer inspection in light of the dramatic rise in the broader market.
Two deals closed during the week, Bitauto Holdings (BITA) and Jernigan Capital (JCAP), which is always a good sign. New blood has also entered the index in the form of Dunkin’ Brands (DNKN) which was ineligible for inclusion last week.
When a market performs this well in such a short period of time it is usual for cash spreads to also exhibit a sizable increase. However, this may not be possible if spreads are already tight. This appears to be the case as far as out T20 Index is concerned. This simultaneously increases any potential downside. We caution traders not to chase spreads simply to employ capital when the risk/reward ratio is moving against them in this manner.
The T20 index closed up for the week by 0.15% with TIF providing a significant gain. The index was comprised of an incomplete complement of 17 merger arbitrage cash deals. The winners outpaced the losers by a margin of 13 to 2 with 2 non-movers. The standard deviation of the individual index returns was 0.57%. This figure is inline with the short term average and marginally above the medium term average figure.
Merger Arbitrage Performance Review - November 8, 2020
Acacia Communications (ACIA)
Acacia Communications was the best performing stock in our index this week. Despite no new deal news the stock appears to have benefitted from the speculation that a Biden presidency may bode well for mergers and acquisitions that have a Chinese connection. As we have previously questioned the progress of this deal as political wrangling between the U.S. and China effect the ability of firms to obtain regulatory clearance we are now in a position to re-evaluate our position. Having previously scaled back this position, we will look to top-up our holding on weakness.
By Friday, ACIA had risen $0.70 or 1.03% for the week to $68.44 giving a simple spread of 2.28%.
Cincinnati Bell (CBB)
A rare mention (again) for Cincinnati Bell this week. This week, the stock reversed last week’s negative return to become the second best performer in the Index. By the close on Friday had finished higher by $0.13, at $15.18, a rise of 0.8659%. This leaves the simple spread at 2.11%.
During the week the company announced Q3 results stating EPS missing by $0.11, but beating on revenue. In addition, also contained with thin 8-K filing with the SEC the company noted with regards to the MIP acquisition,
The Transaction is expected to close in the first half of 2021. It is subject to customary closing conditions, including receipt of certain regulatory approvals.
This potentially lengthy closing timeline and the possibility of drawn out regulatory clearances means this deal is no longer as attractive as it once was. It is unlikely there will be a higher offer as the bids for this firm have already been raised significantly since the firm was first put “in-play”. In light of this, we are not in any rush to open a position here in our discretionary account although we may do so on weakness should the opportunity present itself.
PNM Resources (PNM)
The worst performer in the index this week was the seldom covered PNM Resources. By the close on Friday had finished lower by $0.75, at $49.25, a fall of 1.50%. This leaves the simple spread at 2.13%.
Despite there being no new deal news announced for the stock, the performance bucked the trend of the broader market and headed lower. The company did announce however the exit from Four Corners coal plant seven years ahead of plan in an 8-K Filing. We don’t believe however this is the explanation for the decline. There was also a flurry of shareholder lawsuits filed regarding the acquisition.
We do not currently hold a position but will investigate further and may consider the spread to be an attractive investment opportunity in the future.
Virtusa (VRTU)
Also reporting results during the week was Virtusa. However the stock was one of the worst performers for the week from our index of cash merger arbitrage spreads. This seldom covered stock is currently the subject of a $51.35 per share takeover offer from Baring Private Equity Asia. The deal was formally announced just over a month ago.
This stock had been moving ahead nicely and has already provided traders with some healthy profits. However, by the close on Friday, the stock declined $0.36 for the week, or 0.72%. The simple spread now stands at 2.82%.
The fall comes despite the company announcing EPS in-line with expectations and revenue ahead of expectations. In addition, a DEFA14A filing also revealed
On November 3, 2020, the German Federal Cartel Office (the “FCO”) issued a notice that it approved, effective immediately, the previously announced merger of Austin BidCo Inc. (“Merger Sub”) with and into Virtusa Corporation (the “Company”) pursuant to the Agreement and Plan of Merger (the “Merger Agreement”), dated September 9, 2020
As we previously stated, investors are viewing this deal with the possibility of a superior proposal forthcoming. The expected completion date is H1 2020, because of the regulatory clearances needed from CFIUS, Australia, New Zealand & India as well as HSR. The current annualized return is approximately just over 4.44%. If the deal was to close in 6 months, the return moves up to 5.72%.
We currently have a small position in this stock but we rarely speculate on the possibility of higher bids. Should the stock move up further we will trim our position unless their is reasonable evidence to suggest an alternative bid is likely. As the stock has declined since our last analysis, in line with our previous judgement, we will look to top up our position possibly during the coming week.
