This is the weekly Merger Arbitrage Performance Review – July 19, 2020. This report focusses on FSCT, FIT, BREW & WUBA arbitrage spreads during the period 13th July – 17th 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 12th 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 19, 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 ADI–MXIM, NGHC, SUN–VSLR, CLGX, FIT & TIF.
Table of Returns
Merger Arbitrage Performance Review - July 19, 2020
| Merger Arbitrage Limited | The Market | ||
|---|---|---|---|
| Product | Weekly Change | Product | Weekly Change |
| T20 Index | 0.64% | SPY | 1.30% |
| Index Dispersion | 4.14% | VIX | (5.90)% |
| Winners | 9 | MNA | 1.26% |
| Losers | 7 | ||
Market Performance Review
A sharp decline beginning Monday afternoon and continuing Tuesday morning initially spooked the markets but positive economic data helped reassure investors sparking an impressive recovery rally. Domestic retail sales rose 7.5% in June helped by the direct transfer of funds from the government to consumers. In addition, industrial production rose at its highest rate since 1959.
Both these figures were unexpected positives further highlighting the difficulties in economic forecasting faced by market observers during the pandemic. Interpretation of the data is clouded further when trying to assess the consumer’s reaction to further government intervention. For example, will consumers continue to spend based on the assumption of continuing government support of the economy? Unemployment benefits for many Americans are scheduled to expire at the end of this month and even though congress is expected to reach an aid package extension, it is still yet to do so. By the close on Friday, the SPDR S&P 500 ETF (SPY) index fund finished higher by 1.30%. During the week, the VIX behaved accordingly. By Friday, the index had fallen by just 5.90%.
The IQ Merger Arbitrage ETF (MNA) also finished in positive territory for the week having mirrored the movement of the broader market. This performance was attributed to Forescout Technologies (FSCT) and the revised merger agreement whilst accompanied by the long only position in the Borgwarner (BWA) takeover target Delphi Technologies (DLPH). By the close on Friday, the IQ Merger Arbitrage ETF was up 1.26%.
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. The increase in index weightings as available investible candidates declines has come at an opportune moment and takes advantage in the recovery of target deal stocks such as FSCT.
With no deal closures during the week (although Legg Mason LM is forecasted to close in the near future) and with a handful of new deals recently announced, the signs suggest 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 familiar names such as WMGI and TIF. Readers are advised to check our dedicated deal pages to stay abreast of developments in recently announced deals. This is especially true in light of recent EXPECTED CLOSING DATE updates following the end of the previous quarter.
The T20 index closed up for the week by 0.64% with FSCT providing the majority of this gain. The index was comprised of an incomplete complement of 17 merger arbitrage cash deals and 3 cash positions. The winners beat the losers by a margin of 9 to 7 with 1 non-mover. The standard deviation of the individual index returns was recorded as 4.14%. This figure above both the short term average and the medium term average figure.
Merger Arbitrage Performance Review - July 19, 2020
Forescout Technologies (FSCT)
Forescout Technologies was again the top performing cash merger arbitrage spread this week. The stock received a boost on Wednesday as a resolution to the ongoing dispute between would-be acquirer Advent and the target was acheived. Advent had tried to exit the deal claiming Forescout had indulged in channel stuffing, a claim the target denied and subsequently initiated legal action to complete the deal. The resolution has resulted in a reduction of the original offer price of $33 to $29. The stock finished up for the week by $4.11 at $24.79, a rise of 16.58%. Speaking about the deal terms, an official statement read,
We believe revising the terms of the previously announced transaction is the best path forward for Forescout because it removes the significant ongoing distraction of the pending litigation and delivers immediate and certain value to Forescout’s shareholders.
This is of course great news for investors and merger arbitrageurs. At least, for those who stayed with the stock once the troubles began. However, as longer term stockholders will testify, excluding the Covid crash in March and the recent disagreement with Advent, the stock has barely been below $28 in the last nine months. Those who bought into this spread upon announcement of the deal with Advent may well have paid closer to $33 as traders expected a higher bid was in the offing.
We had noted last week following the upward movement in FSCT how the language had changed in the official documents and how the chances of an amicable solution had increased. The point here is how careful and detailed analysis of official documents may lead to subtle clues about the real intentions of the players. Much analysis has been written and produced on this stock. Well founded analysis for shorting the stock (reverse arbitrage) have been postulated along with less than accurate speculation as to why the deal was falling apart and who was at fault. Articles from reputable outlets have continued to push the COVID-19 narrative as it fits in well with their on-going story arc dominating market activity.
In light of this, we strongly encourage reader, investors and traders to continues sourcing the facts about any particular deal first. It is only then that speculation and personal points of view should be entertained if necessary. Forescout has delivered a bloody nose to many seasoned traders who without the benefit of hindsight made sensible investment decisions at that time. Those brave enough to speculate previously did so in the face of extreme risk (unless of course, that wasn’t speculation). However, merger arbitrage is not about taking unnecessary risks. Those who made the right decision can at least be comforted by the knowledge that they will be presented with another opportunity.
58.com (WUBA)
58.com was the second best performer in the T20 index last week. Despite no deal news or regulatory filings the stock moved forward in line with the broader market. By the end of the week the stock finished up by $0.54 at $55.35, a rise of 0.99% leaving the simple spread at a mere 1.17%. This deal has an original expected completion date of H2 2020. We decided not to take a positon in this stock when the spread was wider due to geo political fears. However the spread has thus far performed well for investors. With the spread as close as it is, we are in no rush initiate a position at this stage.
Craft Brew Alliance (BREW)
BREW suffered yet another negative week following a run of previous positive performances. The stock continues to suffer from complications regarding the divesture of the KONA brand and Hawaiian-based operations. However, as third parties have raised issues with the current disposal plan the situation is becoming more complicated. As reports of the sale involving former BUD connections, investors are asking if this is a feasible plan? and exactly how committed to consummating the deal is Anheuser-Busch? The stock moved down $0.30 or 1.98% to $14.85. The leaves the simple spread at 11.11%. We shall maintain our position for the time being.
Fitbit (FIT)
Fitbit also suffered during the week despite the announcement from GOOG that it pledges not to misuse Fitbit health and fitness data. Whether this is sufficient to convince EU regulators that the deal should be allowed to progress is still unknown. However, the stock did decline sharply on Friday, two days after the Google announcement. Following this decline, the stock finished down by $0.06 at $6.75, a rise of 0.88% leaving the simple spread at 8.89%. 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.
