This is the weekly Merger Arbitrage Performance Review – September 27, 2020. This report focusses on VRTU, ACIA, FIT arbitrage spreads during the period 21st September – 25th September. 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 20th September 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 – September 27, 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 AIMT, CAIXY–BNKXF, IMMU, FIT & TIF.
Table of Returns
Merger Arbitrage Performance Review - September 27, 2020
| Merger Arbitrage Limited | The Market | ||
|---|---|---|---|
| Product | Weekly Change | Product | Weekly Change |
| T20 Index | 2.15% | SPY | (0.58)% |
| Index Dispersion | 5.04% | VIX | 2.13% |
| Winners | 13 | MNA | 1.26% |
| Losers | 4 | ||
Market Performance Review
Despite an impressive recovery rally on Friday the broader market continued its weekly decline for the fourth consecutive period. Surprisingly, this is now the longest downward movement in a year. Lingering concerns over the following topics have remained causing traders to continue to take profits when possible.
- Failure to agree on a new stimulus bill
- Trade tensions with China
- Still no Covid-19 vaccine
On top of these issues, the recent passing of Ruth Bader-Ginsburg has caused political wrangling that has threatened to disrupt any bi-partisan economic discussions. This performance comes against a backdrop of worsening employment data which had previously began to steady. If that isn’t enough, Covid-19 cases in parts of Europe are hitting all-time daily records causing localized lock-downs in a number of countries.
By the close on Friday, the SPDR S&P 500 ETF (SPY) index fund was lower by 0.58%. This caused the VIX to increase and by Friday had gained by 2.13%. However, the IQ Merger Arbitrage ETF (MNA) rallied again demonstrating the diversification benefits of an alternative investment strategy. Vivant Solar (VSLR) was a significant gainer whilst being supported by Livongo (LVGO). By the close on Friday, the IQ Merger Arbitrage ETF was up by 1.26%.
Merger Arbitrage Portfolio Performance Review
Cash merger arbitrage spreads as measured by the Merger Arbitrage Limited T20 Portfolio, produced a performance similar to the broader market this week. A decline in RRGB was partially offset by the recovery in Fitbit (FIT) although Virtusa (VRTU) also posted a sizable loss.
The outlook for merger arbitrage continues to hover between the mixed to promising rage. New deals of various sizes and payment types continue to be announced and the rumor mill seems to have come alive once again. We are yet to see how the upcoming U.S. election may alter the behavior of wall street financiers as they speculate on future White House policy.
The T20 index closed down for the week by 0.66% with RRGB providing a significant loss. The index was comprised of an incomplete complement of 18 merger arbitrage cash deals. The winners were outplayed by a margin of 3 to 15 by the losers with 0 non-movers. The standard deviation of the individual index returns was 1.72%. This figure is significantly below both the short term average and the medium term average figures.
Merger Arbitrage Performance Review - September 27, 2020
Fitbit (FIT)
Fitbit was the top performer from our index of the largest cash merger arbitrage spreads this week. This continues a mild resurgence in the performance of the stock which had previously traded significantly lower when news of regulatory involvement first became public.
In August, EU competition regulators announced an investigation into the deal giving a 90 day deadline. As per an announcement on Wednesday, that deadline has now been extended by two weeks. What might have ordinarily been seen as a negative driver of stock performance was given a positive twist when the statement went on to say the extension had been made
in agreement with the parties…The provisional legal deadline for a final decision in this case is now December 23, 2020
The market viewed this extension as a positive sign working on the assumption the parties are in communication with the regulators and will be able to resolve any issues before the deadline. However at this stage, the Commission has not offered any detail on the reason for allocating more time to take a decision. The original justification for the investigation was to determine if
- data gathered by Fitbit could lead to a distortion of competition if Google was allowed to assimilate the wearable maker
- it would “further entrench” its dominance in online ad markets
- there was an impact on the nascent digital healthcare sector
- Google might be incentivized to degrade the interoperability of rival wearables
Google’s initial statement about the use of Fitbit data have so far done little to appease regulators. However, if this statement is to be interpreted as a sign of tentative collaboration the deal closing probability (DCP) rises significantly.
Having risen steadily throughout the week, by the close on Friday the stock finished higher by $0.16, a rise of 2.51%. This leaves the simple spread at 12.56%. We will continue to hold and may even add to the position going forward. We note however the reduction in the annualized return due to the extension to the forecast completion date. Adjustments to our list of merger arbitrage spreads as given on the website have been made.
Virtusa (VRTU)
Virtusa was one of the largest losers this week. The firm is the subject of a previous unsolicited takeover approach from New Mountain Capital (NMC) but has subsequently recommended a bid from Austin HoldCo Inc., a fund associated with Baring Private Equity Asia. A DEF14A filing on Friday gave some more details about the offer and reaffirmed the expected closing date to be in the first half of 2021. It also stated the deal would need CFIUS approval. Bearing in mind there is an election coming up with a very real chance of a change in leadership this deal may take longer to close than some may anticipate.
By Friday, VRTU had declined $2.01, or 3.98% for the week to $48.50 giving a simple spread of 5.88%. We have no position in this stock and will most likely wait to see how the CFIUS approval unfolds before making an investment.
Acacia Communications (ACIA)
Acacia Communications was also another largest decliner during the week. We previously stated how we had scaled back our ACIA position as we felt the spread had narrowed significantly. Monday saw a decline as Cisco moved lower on rumors of being included on a Chinese blacklist of U.S. companies. The stock spiked higher on Wednesday however as a story by deal reporter suggested SAMR clearance was imminent. These gains however dissipated during the remainder of the week as no further announcement was made. We had previously suggested an announcement was imminent judging by the movement of the stock. In light of this, and based on our previous analysis we may look to top up our positon on weakness ahead of any potential regulatory announcement. By Friday, ACIA had fallen $0.70 or 1.02% for the week to $67.74 giving a simple spread of 3.34%.
