This is the weekly Merger Arbitrage Performance Review – December 13, 2020. This report focusses on the performance of the FIT, SOGO & VRTU merger arbitrage spreads during the period 7th December – 11th December. These stocks were selected from the weekly largest top 20 investable US cash based merger spreads that was available as at 6th December, immediately prior to the analysis period. Investors and traders can follow the latest Top 20 (T20) list each week compiled by Merger Arbitrage Limited to review this week’s largest pending cash merger arbitrage spreads. Regular followers will already be familiar with our rules for inclusion in 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 13, 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 13, 2020
| Merger Arbitrage Limited | The Market | ||
|---|---|---|---|
| Product | Weekly Change | Product | Weekly Change |
| T20 Index | 0.44% | SPY | 0.98% |
| Index Dispersion | 1.43% | VIX | 12.12% |
| Winners | 6 | MNA | 0.44% |
| Losers | 9 | ||
Market Performance Review
Stocks took a breather last week as the broader market suffered from another week of unemployment numbers falling short of expectations. Coupled with the continued failure to agree on the latest round of economic stimulus meant investors were happy to take some money off the table. However, the absence of any catastrophic numbers means a delay until President elect Biden takes office could actually result in a larger stimulus package being announced.
By the close on Friday, the SPDR S&P 500 ETF (SPY) index fund had moved lower by 0.98%. The VIX responded in kind and moved higher as a result of the downward movement in the broader market. By Friday the index was higher by 12.12%. The IQ Merger Arbitrage ETF (MNA) also had a negative week. As the price of oil paused from its recent rise, commodity stocks such as Concho Resources (CXO) and WPX Energy (WPX), along with Xilinx (XLNX) took the index lower. By the close on Friday the ETF was showing a loss by 0.44%.
Merger Arbitrage Portfolio Performance Review
Cash merger arbitrage spreads as measured by the Merger Arbitrage Limited T20 Index finally succumbed to bearish forces during the week. The index posted its first decline in almost three months snapping a winning run extending to ten weeks. The decline was due in large part to the fall in Sogou (SOGO) as investors speculated on the certainty of this deal. This follows on from the decline during the previous week.
There were no closures during and no other stocks were removed from the index. Two existing deals however became eligible to enter the index as there stock prices decline below the offer price. One new deal, MTS Systems (MTSC) was announced which also enters the index. More details about this week’s index list can be found on our Spread Tracker page.
The T20 index closed down for the week by 0.44%. The index was comprised of an incomplete complement of just 15 merger arbitrage cash deals where the winners were outpaced by the losers by a margin of 6 to 9 with 0 non-movers. The standard deviation of the individual index returns was 1.43%. This figure is significantly below both the short term average and the medium term average figure. This lack of movement (dispersion) despite the fall in SOGO is a function of cash merger arbitrage spreads becoming tighter as investors search for alternative sources of value.
Merger Arbitrage Performance Review - December 13, 2020
Virtusa (VRTU)
Virtusa takes the honor this week of the best performing stock in the merger arbitrage index. However, with a weekly return of just 0.24%, it is indicative of the lackluster performance of the index overall. In what was deemed as an unusually quiet week of trading, Virtusa advanced by $0.12 without the announcement of any deal news or company specific factors.
As per the most recent 8-K filed with the SEC,
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.
The simple spread now stands at 2.15%. The current annualized return is approximately just over 3.98%. If the deal was to close sooner, the return could move up significantly. This may be worth considering as the political regime changes. There has also previously been murmurings suggesting a higher bid could be a possibility.
We currently have a medium size position in this stock. Should the stock move up further in the immediate future, we may trim our position because of the long expected closing timeline. However, if there is reasonable evidence to suggest an alternative bid is likely we will more than likely hold on to the position.
SOGOU (SOGO)
Sogou leads the decliners for the second week running. In fact, the stock has now been either the worst or second worst performer from the index for the last four weeks. However, this week’s decline dwarfs all previous movement combined. There was no new deal news made during the week but the size of the movement in the stock clearly suggests there is movement behind the scenes regarding the offer by Tencent for $9 per share. We have reported a number of times how information and announcements regarding this deal have not been forthcoming and it appears this is a similar situation.
Previously, the company announced in a December 1st 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
Upon initial filing of this document to stock hit an intraday low of $8.19 before rebounding back $0.50 over the next few days. However recent movements, far exceeding those made in the broader markets have taken the stock back down to that lower level.
A Form SC 13D/A filed with the SEC on December 3rd revealed Tencent was the majority holder with 58.2% of the company and there has been no update since then. This should remove any financing or shareholder vote issues which bring us back to the approvals required under PRC law. We, in line with other comments made, also suspect there are forces at work which may have access to a superior level of information.
We initially considered this drop to be a knee jerk reaction and thought the drop was overdone. In light of this, we made a small purchase as the stock recovered. However, subsequent movements, and the lack of available information have left us puzzled. We therefore decided to exit the position for a small loss which at the time of writing appears to have been the correct decision.
This decline may well turn out to be a great buying opportunity but we caution traders not to be attracted to the large spread without appreciating the risks involved in investing in this firm. By the close on Friday, the stock had finished lower by another $0.48, at $8.17, a fall of 5.55%. This leaves the simple spread at 10.16%, the largest in the index.
Fitbit (FIT)
Fitbit, which has been a strong performer of late and frequent visitor to the best performers section, took a break this week. With no new deal news announced, the stock succumbed to a combination of market forces and profit taking to take the stock lower. Although the decline was a mere $0.04, it was still sufficient to make it the second worst performing stock in the index this week.
The current offer is for $7.35 per share from Google. 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 had previously appeared to think the announcement would come sooner rather than later.
By the close on Friday, the stock finished lower for the week by $0.04, at $7.21, a fall of 0.55%. This leaves the simple spread at 1.94%. We are happy to continue holding this stock. Although we no longer consider the spread to be as an attractive proposition as previously, the annualized return does provide an attractive figure.
