This is the weekly Merger Arbitrage Performance Review – December 20, 2020. This report focusses on the performance of the SOGO, FIT, CBB & WDR merger arbitrage spreads during the period 14th December – 18th December. These stocks were selected from the weekly largest top 20 investable US cash based merger spreads that was available as at 13th 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 20, 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 TLRY–APHA, AZN–AXLN, WDR, PNM, CRM–WORK, FIT & TIF.
Table of Returns
Merger Arbitrage Performance Review - December 20, 2020
| Merger Arbitrage Limited | The Market | ||
|---|---|---|---|
| Product | Weekly Change | Product | Weekly Change |
| T20 Index | 0.20% | SPY | 0.82% |
| Index Dispersion | 0.74% | VIX | 7.46% |
| Winners | 9 | MNA | 1.01% |
| Losers | 6 | ||
Market Performance Review
Stocks resumed their march forward last week. A combination of increased global vaccine approvals, domestic financial stimulus optimism and the continued improvement in the price of oil all point towards an improving economic situation. Even the continued weakness in the domestic job market does not appear to trouble the markets. However, the worsening situation in the UK, who have recently announced the rapid spreading of a new Covid strain may temper enthusiasm over the festive period. Draconian lockdown measures and the cancellation of Christmas in London and the Southeast indicate the seriousness of the issue.
By the close on Friday, the SPDR S&P 500 ETF (SPY) index fund had moved high by 1.26% which included a dividend payment. The VIX responded in kind and moved lower as a result of the upward movement in the broader market. By Friday the index was lower by 7.46%. The IQ Merger Arbitrage ETF (MNA) also had a positive week. Despite the price of oil moving forward, it was Xilinx (XLNX) along with Inphi Corporation (IPHI) which took the index higher. By the close on Friday the ETF was showing a gain by 1.01%.
Merger Arbitrage Portfolio Performance Review
Cash merger arbitrage spreads as measured by the Merger Arbitrage Limited T20 Index regained its positive momentum last following a blip during the previous week. That decline, which was caused in large part by the fall in Sogou was reversed was reversed last week as the same stock rebounded from those lows.
As expected, there was one closure from the index members during the week as Dunkin Brands (DNKN) completed the sucessful tender offer. Despite there being no new deals eligible for inclusion in the index, there were three existing deals which entered this week. SINA Corporation (SINA), Seacor Holdings (CKH) & Foundation Building Materials (FBM) were admitted as their stock prices declined below their respective offer prices. 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 0.20%. The index was comprised of an incomplete complement of just 18 merger arbitrage cash deals where the winners outpaced the losers by a margin of 9 to 6 with 3 non-movers. The standard deviation of the individual index returns was 0.74%. This figure is significantly below both the short term average and the medium term average figures.
Merger Arbitrage Performance Review - December 20, 2020
SOGOU (SOGO)
Following a number of weekly declines, this week, Sogou leads the winners from our index as the stock rebounds from recent lows. Despite once again there being no new deal news announced during the week, the stock managed to advance as bargain hunters looked for an attractive merger arbitrage spread. 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.
The decline may well indeed turn out to be a great buying opportunity. However, we caution traders not to be attracted to the large spread without appreciating the risks involved in investing in this firm. Traders who have bought this stock as a speculative pursuit will be wise to revisit their position sizing strategy and take profits in line with their risk management principles. By the close on Friday, the stock had finished higher by $0.25, at $8.42, a rise of 3.06%. This leaves the simple spread at 6.89%, and still the largest in the index.
Fitbit (FIT)
Fitbit was given a boost on Friday as European Regulators gave the deal with Google (GOOG, GOOGL) conditional clearance to proceed. A decision had been expected by the January 8 deadline but it appears the commission is prepared to make an early judgement which will limit Google’s use of “sensitive health data for ad targeting”. The deal however still requires regulatory clearances from the DoJ in the U.S. and the Japanese competition authority the Fair Trade Commission (FTC). The DoJ was always expected to make a decision after the EU which traders now hope will be announced sooner rather than later.
The current offer is for $7.35 per share from Google. By the close on Friday, the stock finished higher for the week by $0.04, at $7.25, a rise of 0.55%. This leaves the simple spread at 1.38%. We are happy to continue holding this stock. As previously stated, we no longer consider the spread to be as an attractive proposition as previously although the potential shortened closing time frame may make the annualized return an attractive figure.
Waddell & Reed Financial (WDR)
Waddell & Reed Financial achieves the unwanted recognition of being the worst performing stock in our index this week. Although declining a mere $0.08, the stock still managed to finish bottom of the pile.
At first sight, investors may dismiss this deal as the stock currently trades above the offer price. However, once dividends are included in the calculation, the investment is offering a potential spread of 1.31%. This is not enough to get our mouths watering at this stage, but we shall be watching for any further developments. By the close on Friday, the stock had finished lower by $0.08, at $25.17, a fall of 0.28%.
Navistar (NAV)
Navistar released a set of disappointing results during the week which helped send the stock lower. GAAP EPS of ($2.36) missed analyst’s estimates by $2.65 although revenue of $2.1B beat estimates by $70M. Despite the decline in the stock, the simple spread is still only currently offering 0.94% with the deal is expected to close in the first half of 2021.
We like the prospects of this deal closing successfully but are not currently tempted by this spread. Should the stock move lower however, we will be tempted to take a position as a high prospect of early closing will provide an attractive annualized return. By the close on Friday, the stock had finished lower by $0.12, at $44.08, a fall of 0.27%.
