This is the weekly analysis of Merger Arbitrage Performance Review – April 19, 2020. This reports covers the top 20 investable US cash based merger arbitrage spreads for the week 13th April – 17th April. The first section of this report discusses the biggest winners & losers from the T20 portfolio. Then we detail the performance of the overall portfolio. To conclude, we compare this performance with the broader market and the IQ Merger Arbitrage Exchange Traded Fund – MNA. The information contained in this weekly analysis & review of Merger Arbitrage Performance Review – April 19, 2020 assists traders in their merger arbitrage investments and trading.
In this report, Merger Arbitrage Limited reviews a selection of merger and acquisition deals from the T20 Index. A list of the largest pending cash merger arbitrage spreads available as at 12th April. 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. Click this link for an analysis of the spread performances from the previous week.
Returns Table
Merger Arbitrage Performance Review - April 19, 2020
| The Market | Merger Arbitrage Limited | ||
|---|---|---|---|
| Product | Weekly Change | Product | Weekly Change |
| SPY | 3.03% | T20 Index | 2.41% |
| VIX | 8.45% | Index Dispersion | 4.90% |
| MNA | 1.30% | Winners | 15 |
| Losers | 5 | ||
| Week Ending | Friday April 17, 2020 | ||
Merger Arbitrage Portfolio Performance Review
Cash merger arbitrage continued their recovery last week. Building upon last week’s gains, the market appears to have started to get to grips with this new economic regime. Although this week’s movement would be greatly appreciated in any market environment, the level of movement appears tame by recent standards. Most significant movers went north this week although a handful defied convention and remained in the red. This time out, the winners comfortably triumphed over the losers by a margin of to 15 to 5 with 0 non-movers. The index was comprised of a full complement of 20 merger arbitrage cash deals and 0 cash positions. The index closed up for the week by 2.41%. In what can only be described as a “market shock”, the gains made this were NOT primarily attributable to RRGB! Instead, TGE takes the yellow jersey supported by IOTS, BITA, MLNX & WMGI.
The standard deviation of the individual index returns cooled off during the past week and settled at 4.90%. A high number clearly, but in between the short and medium average readings.
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 information pages for recently announced deals including WUBA, AON & RRGB.
Market Performance Review
The IQ Merger Arbitrage ETF, MNA, started the week off on the wrong foot but soon saw an improvement in its fortunes. A steady rise throughout the remainder of the week was sufficient to put the ETF squarely in the black by the close on Friday. That rally saw the IQ Merger Arbitrage ETF up 1.30%. The broader market had a rather more choppy ride as investors digested the dire economic news whilst simultaneously trying to spot signs of any positivity. Jobless claims continue to escalate suggesting additional problems related to consumer spending further down the road.
However, speculation is that government assistance may alleviate some of this decline in purchasing power although to what extend and effect this will have on any economic recovery remains to be seen. As the U.S. looks to re-open some states, and in effect parts of its economy, investors took the opportunity to jump on board of this latest recovery rally. By the end of the week, the SPDR S&P 500 ETF, SPY, managed to finish gain 3.03%. The VIX unsurprisingly fell from its recent highs. Although by Friday the index had only declined by 8.45%.
The effect of COVID-19 across the globe continues down its devastating path. Travel stocks especially continue to be particularly hard hit which we discuss at greater detail in our latest article Covid-19 and Merger Arbitrage Trading.
In light of popular feedback from previous postings (thank you very much) we shall continue to repeat the following section from our previous analysis
It is important for traders of merger arbitrage to consider how each of their individual positions will be affected by a continued spread of the coronavirus.
- How can this affect the granting of regulatory approval in China?
- Are delays inevitable?
- Will a slowdown in the global economy lead acquirers to rethink their acquisition strategy?
- Also important is that merger arbitrage stocks which were supported by higher floor prices may now have some of that protection removed.
Merger Arbitrage Performance Review - April 19, 2020
Tallgrass Energy (TGE)
Just a quick mention for Tallgrass Energy this week. The deal has closed on the original terms of the offer from Blackstone at $22.45 per share. As mentioned previously, we took only a small position in line with our risk management principles. What this situation does serve to highlight however is the very real level of unpredictability in these markets. In which case, we STRONGLY advise traders to consider any leveraged positions they may currently have (if you’ve not done so already of course!)
Just a few week ago, during the market sell off TGE traded as low as $10.93, a drop of over $11 from previous levels. A leveraged position of 2x in this instance would have almost wiped the position out. For those with enough dry powder to take advantage of the drop a handsome gain was to be made. However, the wave of selling forcing the stock lower, irrespective of the deal particulars was a tide no trader wants to be swimming against. We’re not against using leverage in the right situations, just that in times like these, trading initiated by a margin call trumps deal analysis every single time.
Adesto Technologies (IOTS)
Adesto Technologies got off to a slow start on Monday but some welcome deal news soon put the stock back on track. So much so it became the best performing cash merger arbitrage spread still available in the market. An 8-K filing on Tuesday with the SEC stated that
Adesto Technologies Corporation (NASDAQ: IOTS), a leading provider of innovative application-specific semiconductors and embedded systems for the IoT, announced expiration of the required waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (“HSR Act”) in connection with the previously announced acquisition of Adesto by Dialog Semiconductor plc (XETRA:DLG).
The filing then continued to comment on the expected completion date and additional outstanding regulatory hurdles
The transaction, which is expected to close in the third quarter of 2020, remains subject to Adesto shareholder approval as well as customary closing conditions and receipt of required regulatory approvals, including approval from the Committee on Foreign Investment in the United States (“CFIUS”).
Investors cheered the news and sent the stock up over 8% from this point until the end of the week. By Friday’s close, the stock was up $0.88 at $11.78, a rise of 8.07%. The simple spread is now just 6.54%. Let’s pencil in a 4 month closing timeline and CFIUS clearance, and for that we get a 21% annualized return. In this market, we think that’s pretty close, maybe some edge. It’s a tough call on how CFIUS may act as we move beyond the COVID-19 pandemic. Dialog is a UK based firm traded on the Frankfurt exchange. We’re in no rush to buy this spread right now. Should there be some profit taking following the CFIUS clearance, we will definitely review that position.
Bitauto Holdings (BITA)
Deals with Chinese connections also continue to experience high volatility. Bitauto gained decisively this week on no deal news and no regulatory filings. As stock markets continue to recover, so will the floor price. The share price to which a stock will fall in the event of a deal breaking. As this value moves up, the risk (or downside) declines. This makes buying merger arbitrage stock more attractive. As China tentatively begins to open up parts of its country following the COVID-19 out break, naturally stocks with Chinese connections will tend to perform well.
The stock closed up for the week at $10.96. A rise of $0.45 or 4.28%. This leaves the arbitrage simple spread at 45.99%. We remain holders of our small position in this stock although we remind traders not confuse the difference between a stock rising with the market and a stock rising as its DCP approaches 100%.
Fitbit (FIT)
Fitbit exhibited a rather volatile five days last week. The stock lacked direction and see-sawed almost completely independently of the market. There was no new deal news announced and just two Form 4 – Statement of changes in beneficial ownership of securities filings made with the SEC. By the end of the week the stock finished down by $0.08 at $6.67, a fall of 1.19% leaving the simple spread at 10.19%.
We have written extensively on FIT in the past and noted how we took a small position previously at around the $6.50 level. We suspect the deal may take longer to close than originally forecast, but we are prepared for that risk when buying the stock at this level.
