This is the weekly Merger Arbitrage Performance Review – November 22, 2020. This report focusses on VRTU, SOGO, ACIA & UROV arbitrage spreads during the period 16th November – 20th November. 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 15th November 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 – November 22, 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 RSAIF, HDS, DNKN, IPHI–MRVL, AMD–XLNX, FIT & TIF.
Table of Returns
Merger Arbitrage Performance Review - November 22, 2020
| Merger Arbitrage Limited | The Market | ||
|---|---|---|---|
| Product | Weekly Change | Product | Weekly Change |
| T20 Index | 0.09% | SPY | 0.75% |
| Index Dispersion | 0.39% | VIX | 2.60% |
| Winners | 12 | MNA | 0.65% |
| Losers | 6 | ||
Market Performance Review
The broader market took a breather last week as concerns continued regarding the smooth transition of power to President elect Joe Biden. A worse than expected jobs number was also released reflecting the new lock down measures enacted by a number of states following the increased spread of Covid-19. Continuing hopes of a vaccine however have kept the markets buoyant with a number of different approaches showing progress in different territories. This has led to many portfolio managers repositioning (sector rotation) their portfolios for the “new normal” future economic environment.
By the close on Friday, the SPDR S&P 500 ETF (SPY) index fund was lower by 0.75%. This downward movement caused the VIX to increase and by Friday was higher by 2.60%. The IQ Merger Arbitrage ETF (MNA) on the other hand had a relatively strong week. The ETF performed well due to strong performances in Concho Resources (CXO) and WPX Energy (WPX). These are stock swap deals and their performances reflect the movement in the parent stock as rising oil prices attracted buyers in the energy sector. By the close on Friday, the IQ Merger Arbitrage ETF was up by 0.65%.
Merger Arbitrage Portfolio Performance Review
Cash merger arbitrage spreads as measured by the Merger Arbitrage Limited T20 Index produced a positive performance extending the winning run to eight weeks in a row. Although the return did not match the MNA ETF, the T20 Index was able to remain in the green despite the ever decreasing return available to cash merger arbitrage spreads.
Two deals closed during the week, AMAG Pharmaceuticals (AMAG) & MyoKardia (MYOK) and there was the addition of two new deals in the index, in the form of Foundation Building Materials (FBM) & HD Supply Holdings (HDS).
SINA Corporation has also been removed from the index as the stock traded above the offer price. These changes have extended the average expected closing date but also increased he potential return available. Although we still consider this figure to be low by historical standards.
The T20 index closed up for the week by 0.09% with ACIA providing a significant chunk of that gain. The index was comprised of an incomplete complement of 19 merger arbitrage cash deals. The winners outpaced the losers by a margin of 12 to 6 with 1 non-mover. The standard deviation of the individual index returns was an extremely low 0.37%. This figure is significantly below both the short term average and the medium term average figure. In fact, it is one of the lowest readings on record representing the subdued merger arbitrage spread movement during the week.
Merger Arbitrage Performance Review - November 22, 2020
Virtusa (VRTU)
The last time we commented about Virtusa was following the recent earnings announcement during a week which saw the stock decline significantly. This week also finds VRTU as the worst performer in our index despite some positive deal announcements.
This stock is currently the subject of a $51.35 per share takeover offer from Baring Private Equity Asia. The deal was formally announced in mid September.
The fall comes despite the company announcing the results of the recent shareholder vote at the extraordinary meeting. As expected, shareholders voted to accept the takeover offer and proceed with the deal. An 8-K filed with the SEC on November 20 stated
At the special meeting of Virtusa stockholders held on November 20, 2020, approximately 98.7% of the shares voted were cast in favor of the Transaction, representing approximately 81.1% of Virtusa’s total outstanding shares of common stock. Virtusa will file a Form 8-K disclosing the full voting results.
All positive news, however, the announcement also went on to say
The Transaction, which is expected to close in the first half of 2021, is subject to customary regulatory requirements, including approval from The Committee on Foreign Investment in the United States (CFIUS), and customary closing conditions.
Since our previous note, regulatory clearance from New Zealand has been granted. However, the lack of progress from obtaining CFIUS was a cause for disappointment amongst investors. In addition, there has been no further mention of a possible higher bid. By the close on Friday, the stock declined $0.28 for the week, or 0.72% to $50.02. The simple spread now stands at 2.66%. The current annualized return is approximately just over 4.45%. If the deal was to close in 6 months, the return moves up to 5.39%.
We currently have a medium size position in this stock which we added to earlier in the month. We rarely speculate on the possibility of higher bids so we maintain our previous guidance. Should the stock move up further we will trim our position unless there is reasonable evidence to suggest an alternative bid is likely.
SOGOU (SOGO)
The second worst performer in the index this week was Sogou. By the close on Friday had finished lower by just $0.03, at $8.89, a fall of 0.34%. This leaves the simple spread at 1.24%. Without there being no new deal news announced for the stock, the performance followed the trend of the broader market and headed lower.
We do not currently hold a position but will investigate further and may consider the spread to be an attractive investment opportunity in the future. As we previously mentioned, spread movement is becoming increasingly tight. A situation which often leads to complacency. Investors will be wise to consider the latent risk in their merger arbitrage portfolio.
Acacia Communications (ACIA)
Acacia Communications was the best performing stock in our index this week for the second time in recent memory. Despite no new deal news the stock appears to continue to benefit from the speculation that a Biden presidency may bode well for mergers and acquisitions that have a Chinese connection.
We had hoped to top up our position at lower level but the stock has remained strong and has continued to improve. We will not chase the stock higher. By Friday, ACIA had risen $0.76 or 1.11% for the week to $69.47 giving a simple spread of 0.76%.
Urovant Sciences (UROV)
Urovant Sciences was also a strong performer this week. Despite no significant new deal news to report the stock became the second best performer in the index last week. Some SEC filings were made relating to business partners but not relating directly to the terms of the deal.
By the end of the week, the stock finished up $0.12 at $16.14, a rise of 0.75%. This leaves the simple spread at 0.68%. With such small margins on offer, we are reluctant to open a positon in this stock for the time being.
