This is the weekly Merger Arbitrage Performance Review – October 4, 2020. This report focusses on FIT, SINA, VRTU & ACIA arbitrage spreads during the period 28th September – 2nd October. 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 27th 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 – October 4, 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 SOGO, AIMT, CAIXY–BNKXF, FIT & TIF.
Table of Returns
Merger Arbitrage Performance Review - October 4, 2020
| Merger Arbitrage Limited | The Market | ||
|---|---|---|---|
| Product | Weekly Change | Product | Weekly Change |
| T20 Index | 0.60% | SPY | 1.57% |
| Index Dispersion | 2.06% | VIX | 4.74% |
| Winners | 13 | MNA | 2.09% |
| Losers | 5 | ||
Market Performance Review
Stocks moved higher throughout the week and remained in positive territory at the end despite an announcement from the White House stating the President has contracted the Covid-19 virus. This announcement caused a 1% fall in the broader market as traders speculated on the announcements implications for the economy and the likelihood of an agreement on the latest economic stimulus bill.
As things stand however, the domestic economy continues its recovery albeit at an ever slowing pace. Jobs continue to be created and the unemployment rate is now down to 7.9%. There are still however 10 million more Americans unemployed than what there were in February.
By the close on Friday, the SPDR S&P 500 ETF (SPY) index fund was higher by 1.57%. The White House announcement also caused the VIX to increase and by Friday had gained by 4.74%. The IQ Merger Arbitrage ETF (MNA) rallied again for the fourth week in a row. Netent was a significant gainer and the closing of the Borg Warner & Delphi Technologies (DLPH) deal also provided healthy gains. By the close on Friday, the IQ Merger Arbitrage ETF was up by 2.09%.
Merger Arbitrage Portfolio Performance Review
Cash merger arbitrage spreads as measured by the Merger Arbitrage Limited T20 Portfolio, also produced a positive performance this week. Positive news from the Fitbit (FIT) acquisition by Google (GOOG) and an increased offer for SINA more than offset declines in RRGB and ACIA.
The outlook for merger arbitrage continues to strengthen. A record number of M&A deals were announced during the previous quarter as pent up demand was executed throughout the market. Although this has not provided the number of opportunities we would have hoped for, there however an increasing number of investment available hence our growing confidence in this event driven investment strategy.
The T20 index closed up for the week by 0.60% with FIT providing a significant gain. The index was comprised of an incomplete complement of 18 merger arbitrage cash deals. The winners outplayed the losers by a margin of 13 to 5 with 0 non-movers. The standard deviation of the individual index returns was 2.06%. This figure is significantly below both the short term average and the medium term average figures.
Merger Arbitrage Performance Review - October 4, 2020
In Focus – Fitbit (FIT)
Fitbit was the top performer from our index of the largest cash merger arbitrage spreads this week. This continues a resurgence in the performance of the stock which had previously traded significantly lower when news of the involvement of the EU Antitrust Authority first became public.
Following an extension to the 90 day EU competition investigation which is now scheduled to conclude by December 23, 2020, Google has offered additional concessions to help the deal progress. Amongst these concessions, Google said in a statement are
We’re also formalizing our longstanding commitment to supporting other wearable manufacturers on Android and to continue to allow Fitbit users to connect to third party services via APIs (application programming interfaces) if they want to.
Upon hearing this news the market reacted positively and sent the stock sharply higher in early Tuesday morning trading. This action complements our previous analysis perfectly when we suggested the extension was seen as a positive sign and
working on the assumption the parties are in communication with the regulators and will be able to resolve any issues before the deadline.
Google’s previous statement about the use of Fitbit data had done little to appease regulators. However, this latest round of negotiations is being viewed by many observers as sufficient to allow the deal to proceed and has caused the deal closing probability (DCP) to rise significantly.
Having risen steadily throughout the week, by the close on Friday the stock finished higher by $0.39, at $6.92, a rise of 5.97%. This still leaves the simple spread at 6.21%. We will continue to hold and still consider the relatively large spread to be an attractive investment opportunity.
SINA Corporation (SINA)
Sina became the second best performer in the index last week. Having already seen a bid of $41 per share from New Wave in a “going private” transaction, the offer was increased this week to $43.30. This values the company at approximately $2.59bn. Also on Monday morning, the company announced Q2 earnings which were mildly ahead of expectations.
Having previously seen its share price hover at the previous offer of $41 since early July, there has been much speculation that New Wave MMXV Ltd would increase their offer. However, without any company or specific deal news announced it is easy to assume this stock was moving inline with the broader market which exhibited increased volatility. This makes investing in this deal a difficult proposition. SINA had previously assembled a special committee to evaluate the non-binding proposal from New Wave, a company incorporated in the British Virgin Islands. The lack of disclosure on this issue left many investors with little or no information upon which to make an investment decision. For this reason we held off making an investment.
However, following Monday’s announcement, the stock moved higher during the week and finished up $2.28 at $42.47, a rise of 5.67%. This leaves the simple spread at 1.95%, a level which despite all that has happened we find strangely attractive.
Virtusa (VRTU)
Virtusa was also a strong performer during the week. A DFAN14A filed with the SEC on Thursday announced the
Canada Pension Plan Investment Board (CPP Investments) confirms an equity commitment of US$300 million alongside Baring Private Equity Asia (BPEA) in respect of the proposed acquisition of Virtusa Corporation (Virtusa), a global provider of digital strategy, digital engineering, and IT services and solutions that help clients change and disrupt markets through innovation engineering. CPP Investments will hold a stake of approximately 24% in the business.
A previous DEF14A filing gave additional 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 $0.75, or 1.55% for the week to $49.25 giving a simple spread of 4.26%. 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 suffered from broader marker influences during the week to become one of the T20 Index’s worst performers. Although there was no direct deal news announced, the stock remains under a cloud as rumors persist that Cisco is being included on a Chinese blacklist of U.S. companies. The deal continues to await SAMR clearance despite stories claiming it is imminent.
We previously stated how we had scaled back our ACIA position as we felt the spread had narrowed significantly. Following this decline we may look to top up our positon on weakness ahead of any potential regulatory announcement. By Friday, ACIA had fallen $0.70 or 1.03% for the week to $67.04 giving a simple spread of 4.42%.
