This is the weekly Merger Arbitrage Performance Review – June 21, 2020. This report focusses on TECD, FIT, TIF & FSCT arbitrage spreads during the period 15th June – 19th June. 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 14th June 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 – June 21, 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 TKAYF & GRUB, TECD & TIF.
Table of Returns
Merger Arbitrage Performance Review - June 21, 2020
| Merger Arbitrage Limited | The Market | ||
|---|---|---|---|
| Product | Weekly Change | Product | Weekly Change |
| T20 Index | 0.32% | SPY | 1.46% |
| Index Dispersion | 2.63% | VIX | 2.69% |
| Winners | 12 | MNA | 0.55% |
| Losers | 5 | ||
Market Performance Review
Gains made in the broader market on Monday & Tuesday were more or less maintained throughout the rest of week. Traders were buoyed by a rise in domestic retail sales accompanied by the possibility of a government spending program of up to $1bn on infrastructure. Meanwhile the federal reserve also announced its intention to lend support to the credit markets by buying corporate bonds. Markets appeared to shrug off the rise in in COVID-19 cases in selected areas. By the close on Friday, the SPDR S&P 500 ETF (SPY) index fund was firmly in the black finishing higher by 1.46%.
The VIX unsurprisingly endured a well behaved fall during the same period. By Friday, the index had fallen by 2.69%.
The IQ Merger Arbitrage ETF (MNA) also managed to finish in positive territory for the week. This performance broadly mirrored the performance of the broader market. Gains experienced in Tech Data Corporation (TECD) and Fiat Chrysler (FCA) were the primary sources of return. By the close on Friday, the IQ Merger Arbitrage ETF was up 0.55%.
We 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?
- Are individual merger arbitrage stocks still supported by higher floor prices now that the market kas moved lower?
Merger Arbitrage Portfolio Performance Review
Cash merger arbitrage spreads recovered this week following last weeks significant decline. Deals continues to close, for example KEM, whilst despite various market rumors other existing deals such as TECD move towards successful completion. The exception to this rule is Forescout (FSCT) which held the performance of the index back this week as the takeover seeks a court based legal solution.
The T20 index closed up for the week by 0.32% with TECD & FIT providing the majority of this gain. The index was comprised of an incomplete complement of 18 merger arbitrage cash deals and 2 cash positions. The winners beat the losers by a margin of 12 to 5 with 1 non-mover. The standard deviation of the individual index returns returned to normal levels despite the disparity of returns from the extreme movers in the index. This week’s figure was recorded as 2.63%. This puts the number below the short term average and broadly in line with the medium term average figure.
Merger Arbitrage Performance Review - June 21, 2020
Tech Data Corporation (TECD)
A strong rise on Monday was enough to propel Tech Data Corporation to the top of the best performing merger arbitrage spreads last week. The move comes despite no official deal updates or announcements and was fueled by trading volume four times the recent average. Unlike alternative merger arbitrage spreads, The company had recently announced a solid set of results which had placated investors fears of the feasibility of the deal. However, this latest move seems to indicate an announcement of some sort is imminent.
Movements of this nature make merger arbitrage trading a treacherous endeavor at the best of times. Let alone during unprecedented economic upheaval in the midst of a pandemic. It is not our position to suggest a key piece of information is this puzzle is already known by a selected few. However, as movements such as these do occur, it highlights the importance of doing one’s previous research on a deal and being able to take an objective view of the situation whilst not getting caught up in day to day volatility. This allows traders to identify deals trading at attractive spreads before the price moves, or possibly be manipulated in a way that is unfavorable to traders. Thus avoiding trading based upon knee-jerk reactions.
By Friday the stock finished the week up $6.76 at $142.99, a rise of 4.96%. The simple spread now at 1.41%. The expected closing date as originally forecast was Q2 2020. The latest date of which is almost upon us. We therefore expect an announcement soon possibly related to the regulatory clearance in Australia. We had previously stated we may look to initiate a position in the near future but decided to hold off until after earnings. In light of this and the advancement made in the stock, we shall now wait for a pull back before entering a position.
Fitbit (FIT)
Despite some negative deal news during the week Fitbit still managed to put in the second best positive performance amongst merger arbitrage spreads last week. The news centered around the launching of an investigation by the Australian regulators into whether it will give Google access to too much of peoples data and harm competition. However, the most significant news is the setting of a July 20 deadline by the EU antitrust regulators as to whether to clear Alphabet Inc. owned Googles $7.35 per share takeover offer.
Although this doesn’t offer any clues as to the outcome, it does provide additional clarity as to the closing timeline to the deal. For that reason, by the end of the week the stock finished up by $0.27 at $6.38, a rise of 4.42% leaving the simple spread at 15.20%. We are in no rush to sell our position and will most likely continue to hold even if the deal does take longer to close than originally forecast.
Tiffany & Co. (TIF)
Tiffany & Co. also performed well during the week. This spread has widened recently as speculation continues as to whether LVMH are looking to renegotiate the deal. However, the basis for this analysis appears sketchy at best. During the week, the stock recovered some lost ground as investors look to pick up a bargain and turn a quick profit. We will maintain our small positon which we recently entered into. At the close on Friday, the stock had risen $2.34, or 1.97% to $120.88, the deal is now offering a simple spread return of 11.68%.
Forescout Technologies (FSCT)
Forescout was amongst the losers again last week as a flurry of law firms rushed to sign up clients ahead of class action deadlines. The company is currently in the middle of a legal battle with Advent who are attempting to exit the deal via a material adverse clause claim. Despite a mini bump during the week, the stock finished down for the week by a further $0.77 at $21.69, a fall of 3.43%. Although the simple spread may look tempting at 52.14%, we are not looking to take a position in this stock.
