The annualized return is a figure that takes the current available deal spread and scales up the time remaining on the deal to reach an annualized figure. This assists comparison between deals. However, the extent of the usefulness of this comparison is limited to deals with similar characterizes. For example, in merger arbitrage investments, comparing a tender offer with a stock swap deal might not be feasible. Each deal structure has different requirements and different risks associated with it. There may also be geographical issues to consider. These risk factors would need to be studied in isolation before any investment decision could be made. The annualized return figure does however provide a quick guide to what is available in the market.
The annualized return builds upon what is known as the simple spread referred to frequently throughout this website. This is simply the percentage return available to investors when buying the target stock and subsequently receiving the offer price upon successful deal consummation. This return may include dividends or other distributions if applicable. The annualized return expands this formula by including a time element.
Annualized Return Input Data
As with most calculations in finance, there are a variety of inputs to choose from in order to complete the annualized return calculation. For example, the original length of time over which the return is analysed that needs to be scaled up. Completion dates may be either the expected completion date as given in the original offer document by the acquirer or a proprietary forecast completion date as calculated by Merger Arbitrage Limited. Both of these dates have their benefits and drawbacks and can arrive at vastly different outcomes. The expected completion date is usually given as the end of a calendar quarter or a half-yearly date by the acquirer and is widely disseminated. Whereas the forecast completion date is more precise but perhaps less understood.
