This is the weekly Merger Arbitrage Performance Review – July 12, 2020. This report focusses on FSCT, FIT, BREW & TIF arbitrage spreads during the period 6th July – 10th July. 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 5th July 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 – July 5, 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 SUN & VSLR, CLGX, FIT & TIF.
Table of Returns
Merger Arbitrage Performance Review - July 12, 2020
| Merger Arbitrage Limited | The Market | ||
|---|---|---|---|
| Product | Weekly Change | Product | Weekly Change |
| T20 Index | 0.78% | SPY | 1.72% |
| Index Dispersion | 5.38% | VIX | (1.41)% |
| Winners | 9 | MNA | 1.24% |
| Losers | 5 | ||
Market Performance Review
The broader market recovered from a mini sell-off on Thursday to further extend the Covid rally. Technology led the way higher, of which TESLA was of significant note. The business environment, as measured by the non-manufacturing Purchasing Managers Index posted a expansionary reading to help further fuel the rally. Despite consistently high readings in the new number of Covid cases recorded in the U.S., traders remain convinced the return to economic normality is nigh. However, as some states begin to curtail or even reverse their re-opening policies it remains to be seen whether the stock market, or at least those sectors most at risk, will decline in accordance with political actions. By the close on Friday, the SPDR S&P 500 ETF (SPY) index fund was firmly in positive territory finishing higher by 1.72%.
During a mildly volatile week, the VIX remained relatively steady. By Friday, the index had fallen by just 1.41%.
The IQ Merger Arbitrage ETF (MNA) also finished in positive territory for the week having tracked the rise in the broader market from the mid-point on Thursday. This performance was attributed to the recovery on Forescout Technologies (FSCT) & Fitbit (FIT) whilst accompanied by the long only positions in TD Ameritrade (AMTD) and E*Trade (ETFC). By the close on Friday, the IQ Merger Arbitrage ETF was up 1.24%.
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 continued the recent trend by producing yet another positive return this week. An slight increase in the weighting of the constituents due to the lack of available opportunities helped the return move higher espicially in deals such as FSCT.
With no deal closures during the week and a number of new deals being announced in the M&A space the signs are suggesting there is at least some scope for merger activity. This new blood is vital to the continuation of merger arbitrage as a consistent investment strategy. Positive performances from spreads that have been in the doldrums lately include issues such as FIT and ACIA. Readers are advised to check our dedicated deal pages to stay abreast of developments in recently announced deals.
The T20 index closed up for the week by 0.78% with TIF providing the majority of this gain. The index was comprised of an incomplete complement of 16 merger arbitrage cash deals and 4 cash positions. The winners beat the losers by a margin of 9 to 5 with 1 non-mover. The standard deviation of the individual index returns was recorded as 5.38%. This puts the figure comfortably above both the short term average and the medium term average figure.
Merger Arbitrage Performance Review - July 12, 2020
Forescout Technologies (FSCT)
Forescout was the top cash merger arbitrage performer last week as traders were encouraged about the prospects of a successful deal consummation. The stock rose steadily throughout the week helped by a variety of positive news. First of all, news of the Q2 earnings report suggesting figures were to be ahead of the market consensus. Also contained in that particular 8-K filing was a reference to the ongoing takeover dispute with Advent. Michael DeCesare, CEO and President of Forescout Technologies said:
I am extremely proud of our team’s performance. We remained focused and executed well, despite macroeconomic challenges and the impact of ongoing litigation with Advent International. The strength of our quarterly results shows the compelling value proposition for Forescout’s solutions and that we can execute and deliver despite obstacles. We believe Advent’s claims are without merit, and we are continuing to pursue our rights under the existing merger agreement.
Then on Friday it was reported Advent had asked the case, currently set for July 20, to be adjourned because “because the original lenders for the Forescout acquisition terminated their debt commitment.” Advent says it has contacted alternate lenders with no luck and is willing to agree to a deal termination date extension.
Implications
The tone of this language is of particular note. Previously Advent had appeared confident any court action would result in their favor and that Forescout would be found at fault. This latest twist appears to lessen that stance and with FSCT resolute in their defense of no wrong doing this outcome has become a lot more difficult to call. We believe the rise in the stock price reflects the increased probability of an amicable resolution. Whereas we may have been tempted to take a small speculative position previously, at these levels, we will decline to do so. The stock finished up for the week by $3.22 at $24.79, a fall of 14.93%. Although the simple spread may look tempting at 33.12%, we are not looking to take a position in this stock at this moment in time.
Fitbit (FIT)
Fitbit also shaped up with some positive news during the week. Negative murmurings has been circulating in the press recently regarding competition issues surrounding Google’s proposed takeover. The Australian regulator first voiced concerns then the EU announced they would investigate possible data privacy issues. However a more conciliatory approach has been taken by the EU during the week whereby an investigation can be avoided if GOOG, GOOGL pledges not to use Fitbit health data to target ads. Clearly, this news sent the stock soaring higher. By the end of the week the stock finished up by $0.52 at $6.81, a rise of 8.27% leaving the simple spread at 7.93%. 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.
Craft Brew Alliance (BREW)
BREW suffered a reversal of fortunes this week following last week’s successful run. The stock had been progressing well as asset disposal news was welcomed by traders and the deal closing probability increased. However, during the week if was revealed the company may face an “uphill battle” getting DOJ approval as third parties have raised issues with the current disposal plan. Although this point was thinly reported in the wider media it still managed to have a significant effect on the stock price.
This latest development appeared somewhat unexpectedly. It was previously assumed the sale was progressing. Subsequently, the stock moved down $0.48 or 3.07% to $15.15. The leaves the simple spread at 11.72%. The expected completion date is unchanged from the previous guidance of “the transaction is expected to close in 2020”. We shall maintain our position for the time being.
Tiffany & Co. (TIF)
Tiffany & Co. which was the star performer last week, like BREW, also finds itself in the largest losers this week. At the close on Friday, the stock had fallen $0.92 or 0.75% to $121.30. The deal is now offering a simple spread return of 11.29%. The drop came despite Monday’s news that the Australian Foreign Investment Review Board issued a notification indicating that it has no objection to the Merger. We will continue to maintain our position for the foreseeable future.
