The forecast completion date is the date as forecast by Merger Arbitrage Limited of when a given deal is expected to consummate. This calculation, exclusive to Merger Arbitrage Limited patrons, produces a more accurate deal closing date than the Expected Completion Date given by the acquirer. Often, the expected date is only indicated by calendar quarter (and occasionally half yearly) whereas the forecast completion date, using a proprietary formula, achieves a greater level of accuracy based upon a selection of unique and proprietary inputs. In addition to the improved accuracy of the date, the calculation also exhibits a narrower error range than the expected date. This figure assists tremendously in improving the accuracy of calculating the annualized return and comparing deals.
Our unique merger arbitrage spread list gives readers FREE access to the company issued expected completion date. This information is updated as new official announcements are made. In the absence of the official expected completion date, as is often the case in a hostile takeover, a best efforts estimate made by MAL is used. The expected completion date is then used as a starting point to calculate a more accurate and specific forecast completion date along with a number of thoroughly researched variables.
Forceast Completion Date in Use
After the risk of a deal failing, as measured by the Deal Failure Probability (DFP), deal extension risk is the second biggest risk to the profitability of merger arbitrage trading. Acquiring firms often round up and/or tend to overstate the time required to complete a takeover. This allows some slack in the timeline to overcome potential unexpected issues. This is especially true if the deal takes place in a protected industry such as telecommunications or possibly the semi-conductor industry. For some deals, it may be difficult to judge whether or not additional regulatory oversight (such as second request for information under HSR) will be required. Firms need to build this possibility into their completion timelines so as not to appear incompetent. A deal which fails to close in the expected timeframe can create unnecessary costs to the trader. Costs, such as short selling borrowing costs (in stock deals), borrowing costs on positions using leverage, or even the opportunity cost of not being able to make an investment in an alternative deal may cost the trader dearly.
It is therefore important that investors who trade a merger arbitrage investment strategy fully understand what is required to calculate an accurate level of annualized return for a trade. This accurate return figure will also allow greater comparison between different merger arbitrage deals when selecting potential investment candidates. For advanced traders using various options strategies, especially those relying on front month options expiring worthless such as a calendar spread, an accurate forecast completion date becomes even more important.
Merger Arbitrage Limited has produced a separate guide to analyse this risk entitled Hidden Risk in Merger Arbitrage – Deal Extension.
