This is the weekly Merger Arbitrage Performance Review – December 27, 2020. This report focusses on the performance of the SOGO, FIT, PNM & VRTU merger arbitrage spreads during the period 21st December – 24th December. These stocks were selected from the weekly largest top 20 investable US cash based merger spreads that was available as at 20th 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 27, 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 AJRD, TLRY–APHA, AZN–AXLN, WDR, PNM, FIT & TIF.
Table of Returns
Merger Arbitrage Performance Review - December 27, 2020
| Merger Arbitrage Limited | The Market | ||
|---|---|---|---|
| Product | Weekly Change | Product | Weekly Change |
| T20 Index | 0.40% | SPY | 0.04% |
| Index Dispersion | 1.47% | VIX | 0.19% |
| Winners | 8 | MNA | 0.32% |
| Losers | 11 | ||
Market Performance Review
Stocks paused for breath in this holiday shortened week although some intraday movements were still noteworthy. Markets are still digesting the significance and impact of the recently imposed severe lockdown measures now in force across many parts of Europe over the festive period. Markets had high hopes as a bipartisan stimulus package was agreed but as at time of writing, the President has refused to sign off on the bill. This comes amid a worsening employment situation. However, the rolling out of the Covid vaccine has given many a reason to be optimistic for the new year.
By the close on Friday, the SPDR S&P 500 ETF (SPY) index fund had moved lower by just 0.04%. The VIX also posted a sedate performance figure and by the end of the week had also drifted marginally lower. By Friday the index was lower by 0.19%. The IQ Merger Arbitrage ETF (MNA) also had a negative week. Xilinx (XLNX) was the main culprit taking the ETF lower despite a small advance in Eaton Vance (EV). By the close on Friday the ETF was showing a loss of 0.32%.
Merger Arbitrage Portfolio Performance Review
Cash merger arbitrage spreads as measured by the Merger Arbitrage Limited T20 Index also suffered during the week. The decline was due in large part to uncertainties regarding the Google (GOOG, GOOGL) acquisition of Fitbit (FIT) combined with the renewed weakness in Sogou.
As expected, there was one tender offer which closed during the week for which we are still waiting for official confirmation of the result. HD Supply Holdings (HDS) saw its tender offer close on Dec. 23, the expected result is a successful consummation of the deal which should be announced shortly (probably Monday) following the holiday closing schedule. Both new and existing deals enter the list this week adding fresh blood and improving potential returns. 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 0.40%. The index was comprised of a complete complement of 20 merger arbitrage cash deals for the first time in a significant number of months. The winners were outpaced by the losers by a margin of 8 to 11 with 1 non-mover. The standard deviation of the individual index returns was 1.47%. This figure is below both the short term average and the medium term average figures.
Merger Arbitrage Performance Review - December 27, 2020
Virtusa (VRTU)
Virtusa takes the honor of the best performing stock in the merger arbitrage index this week for the second time in three weeks. The stock has been moving towards its offer price as traders speculate on an imminent deal closing. This act was justified during the week as an 8-K filing with the SEC informed us
On December 21, 2020, Virtusa Corporation, a Delaware corporation (the “Company”), received written notice from the Committee on Foreign Investment in the United States (“CFIUS”) that it had concluded its review under Section 721 of the Defense Production Act of 1950, as amended, of the previously announced merger of Austin BidCo Inc., a Delaware corporation (“Sub”), with and into the Company pursuant to the Agreement and Plan of Merger (the “Merger Agreement”), dated September 9, 2020, among the Company, Austin HoldCo Inc., a Delaware Corporation and an entity wholly owned by funds affiliated with Baring Private Equity Asia, and Sub (the “Merger”). CFIUS determined that there are no unresolved national security concerns with respect to the Merger.
The filing went on to say
Receipt of the CFIUS clearance satisfies a certain condition to the closing of the Merger. The closing of the Merger remains subject to the satisfaction or waiver of the remaining conditions to the Merger set forth in the Merger Agreement.
There was no mention however of the closing date which we assume officially remains as “first half of 2021“. However, in light of this recent development, we expect the actual closing date to be sooner rather than later.
This has of course been reflected in the simple spread which now stands at just 0.51%. The current annualized return is approximately just over 1.01% although in practice we expect this to be higher. The stock moved $0.80 higher during the week to $51.09, a rise of 1.59%. We currently have a medium size position in this stock. Our previous analysis of…
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.
…is modified slightly in that we consider CFIUS approval to significantly shorten the expected deal closing timeline and will therefore maintain our position.
Fitbit (FIT)
When we last commented on Fitbit it was celebrating as European Regulators gave the deal with Google (GOOG, GOOGL) conditional clearance to proceed. It was thought at the time that this decision would pave the way for a favorable outcome as per the regulatory clearances from the DoJ in the U.S. and the Japanese competition authority the Fair Trade Commission (FTC) which are still required.
Since that time however, the Australian Competition and Consumer Commission has rejected Google’s (GOOG,GOOGL) antitrust concessions for the $2.1B acquisition. Although this is a much smaller market in comparison, it has worried some investors that the U.S. authorities may take a similar stance and cite the same concerns.
Google had previously offered concessions including agreeing not to use the health data for advertising and behaving in certain ways toward competitors that would ensure competition wasn’t stifled. Although similar concessions worked with the European Union Authorities, the Australian regulators were not convinced.
Is seems unlikely that Google would now come this far to give up on this deal. Especially as conditional clearance has already been granted in the EU. We would expect to see additional negotiation taking place before any hard decisions are taken by either Google or Fitbit. This will most likely cause a delay in the expected deal closing timeline.
We are happy to continue holding this stock. In line with our risk management principles and current level of diversification, we might look to make a small addition to our position during the week. The current offer is for $7.35 per share from Google. By the close on Friday, the stock finished lower for the week by $0.41, at $6.84, a fall of 5.66%. This now puts the simple spread at 7.46%.
SOGOU (SOGO)
Following a number of weekly declines, Sogou again finds itself in the laggards section from our index reversing last week’s sole rally. Despite once again being no new deal news announced during the week, the stock declined as investors continued to speculate on the fate of the deal. We have reported a number of times (and continue to do so) on how information and announcements regarding this deal have not been forthcoming and it appears this situation is continuing.
The decline may indeed however turn out to be a great buying opportunity. Although 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 lower by $0.25, at $8.17, a fall of 2.97%. This leaves the simple spread at 10.16%, and still the largest in the index.
PNM Resources (PNM)
Another worst performer in the index this week…..YET AGAIN… was the seldom covered PNM Resources (seldom, other than the last time we recently discussed this stock). By the close on Friday had finished lower by $0.41, at $48.65, a fall of 0.84%. This leaves the simple spread at 3.39%. However, a reasonable dividend yield increases this merger spread to an attractive level although the lengthy expected completion date has caused some to take some money off the table.
The only news announced during the week was an 8-K filing with the SEC regarding the “Entry into a Material Definitive Agreement” in connection with a loan agreement. There was no mention of the pending takeover.
We do not currently hold a position but at these lower levels we will quite likely take a position in the near future. Dividend investors may also find this an attractive play. However, the extended completion timeline and the regulatory hurdles that need to be cleared may reduce the attractiveness of this spread.
