This is the weekly Merger Arbitrage Performance Review – December 6, 2020. This report focusses on FIT, ACIA, VAR & SOGO arbitrage spreads during the period 30th November – 4th December. 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 29th 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 – December 6, 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 WDR, PNM, CRM–WORK, SPGI–INFO, RSAIF, FIT & TIF.
Table of Returns
Merger Arbitrage Performance Review - December 6, 2020
| Merger Arbitrage Limited | The Market | ||
|---|---|---|---|
| Product | Weekly Change | Product | Weekly Change |
| T20 Index | 0.11% | SPY | 1.68% |
| Index Dispersion | 0.72% | VIX | 0.24% |
| Winners | 13 | MNA | 0.03% |
| Losers | 2 | ||
Market Performance Review
Stocks ploughed forward yet again last week once again setting new highs across all major indices. This came despite the ever increasing record numbers of domestic Covid-19 cases and a disappointing jobs report. However, missing the forecast estimate, whilst not being a catastrophic number, greatly increases the probability of a generous stimulus package from the incoming government. The markets, as quick as ever to realize this pushed stocks to unprecedented levels.
By the close on Friday, the SPDR S&P 500 ETF (SPY) index fund had moved higher by 1.68%. The VIX however remained resilient, and perhaps demonstrating the latent risks involved in owning stocks at these levels, moved no more than a touch lower by 0.24%. The IQ Merger Arbitrage ETF (MNA) on the other hand had another indifferent week. The ETF would have been expected to perform well as the price of oil improved and had a knock-on effect on stocks such as Concho Resources (CXO) and WPX Energy (WPX). However, with the decline of Eaton Vance (EV), the ETF was only able to produce a marginal decline of by 0.03%, reversing exactly the gain made in the previous week.
Merger Arbitrage Portfolio Performance Review
Cash merger arbitrage spreads as measured by the Merger Arbitrage Limited T20 Index ground out yet another positive performance during the week. This now extends the winning run to an incredible 10th straight week! The Index was able to post a modest increase, due to the continued appreciation of Fitbit (FIT) and Acacia (ACIA) moving above its current offer price. Even the notable decline in Sogou was not enough to drag the index into negative territory.
Three stocks which had previously been included in the index closed during the week demonstrating how the M&A market has returned to normal operation since the beginning of the Covid pandemic. These stocks were Hudson (HUD), Mobileiron (MOBL) & BioSpecifics Technologies (BSTC). More details about this week’s index list can be found on our Spread Tracker page.
The T20 index closed up for the week by 0.11%. The index was comprised of an incomplete complement of just 16 merger arbitrage cash deals where the winners outpaced the losers by a margin of 13 to 2 with 1 non-mover. The standard deviation of the individual index returns was 0.72%. This figure is significantly below both the short term average and the medium term average figure. This lack of movement (dispersion) as referred to in previous articles is due to cash merger arbitrage spreads becoming increasing tight as the broader market continues to move higher.
Merger Arbitrage Performance Review - December 6, 2020
Fitbit (FIT)
Fitbit continued its march towards the $7.35 offer price from Google last week as it was reported the EU was close to granting permission for the deal to proceed. An announcement could be made as early as next week according to some sources. This news was enough to put the stock at the top of the best performers this week.
Currently, the EC is scheduled to conclude its investigation by January 8, 2021 having launched a full investigation of the deal in August. Although the market appears to think the announcement will come sooner rather than later. The investigation is focused on Google’s potential use of health data in its targeted advertising.
By the close on Friday, the stock finished higher for the entire week by $0.07, at $7.25, a rise of 0.97%. This leaves the simple spread at 1.38%. We are happy to continue holding as the finish line is just starting to come into view. Although we no longer consider the spread to be an attractive proposition like previously. However, the annualized return could provide an attractive figure if closure was to come during the month ahead for those willing to take the risk.
Acacia Communications (ACIA)
Acacia Communications was the second best performing stock in our index this week. The stock has been performing well for some time as optimism grows for a successful consummation of the deal. Closing has so far been delayed as the market waits for the final regulatory hurdle to be cleared. Speculating on the timing of Chinese regulatory approval is notoriously difficult, but rumors surrounded the stock this week that a decision was imminent.
However, what is of greatest interest is the level achieved by the stock price during the week. It is reasonable to assume that as a deal nears 100% deal closing probability, the target stock price will converge upon the offer price. Acacia however has shot straight past this level and now trades at a 1% premium to the offer price. Different theories have been proposed for this movement, such as a higher offer, but there remains no details of note in the mainstream media. Other rumors have suggested traders may be taking a strategic “tax-loss” but as yet remain unsubstantiated. To address these issues in a more comprehensive manner, we have produced a feature length article on Seeking Alpha.
In accordance with Index construction rules, we have removed the stock from the index as it trades over the offer price. Additionally, we have also exited our trading position at a healthy profit with the bonus of the additional excess offer premium. Even if there is a higher offer forthcoming, we remain happy to take our funds (and profits) off the table. By Friday, ACIA had risen $0.62 or 0.89% for the week to $70.33 giving a negative simple spread of (0.47)%.
Varian Medical (VAR)
Varian Medical makes a rare appearance in our analysis this week. As the third best performer in the index this week the stock moved higher by $0.76, a rise of 0.44% to $174.66. This leaves the simple spread at 1.63%.
There was no new deal news or SEC filings made during the week so we assume this rise is down to a combination of the increase in the broader market (raising the floor price of cash merger arbitrage stocks) and traders seeking any kind or return as spreads continue to be squeezed. We do not have a position in this stock and have no immediate plans to initiate one.
SOGOU (SOGO)
Sogou receives the wooden spoon this week as champion of the laggards. An announcement on December 1 in an SC 13E3/A filing with the SEC stated that
In order for the Merger to be completed, the closing conditions under the Merger Agreement, including the passage of not less than 20 days after this Transaction Statement is first mailed to the shareholders of the Company and the making and obtaining of the PRC Regulatory Filings or Approvals in accordance with applicable PRC law, must be satisfied or waived. The parties are working toward completing the Merger as quickly as possible and currently expect the Merger to be completed by the first half of 2021, subject to all conditions to the Merger having been satisfied or waived
This sent the stock down to a low of $8.19 just before the market close. This turned out to be an incredible buying opportunity for those who were quick enough as the stock recovered immediately the next morning to the $8.50’s. Despite the extension to the expected closing date we felt the drop in the price was over done. In our previous commentary we stated the spread could be attractive if it was to close when previously expected. Although this has been extended we felt the stock trading in the $8.50’s was a reasonable investment and we decided to take the plunge.
By the close on Friday the stock had finished lower again by another $0.21, at $8.65, a fall of 2.37%. This leaves the simple spread at 4.05%.
