This is the weekly Merger Arbitrage Performance Review – January 31, 2021. This report focusses on the performance of the WDR, SINA, SOGO, & AJRD merger arbitrage spreads during the period 26th January – 29th January. These stocks were selected from the weekly largest top 20 investable US cash based merger spreads that was available as at 24th January, 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 – January 31, 2021 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 LITE–COHR, CHNG, AJRD, TLRY–APHA, WDR & PNM.
Table of Returns
Merger Arbitrage Performance Review - January 31, 2021
| Merger Arbitrage Limited | The Market | ||
|---|---|---|---|
| Product | Weekly Change | Product | Weekly Change |
| T20 Index | 0.54% | SPY | 3.35% |
| Index Dispersion | 0.87% | VIX | 51.03% |
| Winners | 3 | MNA | 0.60% |
| Losers | 16 | ||
Market Performance Review
Equity markets suffered their worst decline in three months during the week. GDP for the fourth quarter came in lower than expected following the significant Q3 rebound. The FOMC message was that the outlook remains uncertain and so asset purchases will continue for some time. In the meantime, market volatility was exaggerated by the short squeeze trading induced by the subreddit group “Wall Street Bets” on the popular chat board Reddit. Gamestop, which had been below $4 just a few months previously, saw its stock breach $500 at one point. Controversial trading curbs and restrictions have now been put in place in an attempt to calm market volatility.
By the close on Friday, the SPDR S&P 500 ETF (SPY) index fund had moved lower by 3.35%. Accordingly, the VIX responded by moving higher and by the end of the week was up 51.03%. The IQ Merger Arbitrage ETF (MNA) also had a negative week. Significant losses in Maxim Integrated Products (MXIM) and Xilinx (XLNX), both reversing the previous week’s gains (which in turn reversed the prior period’s losses), were the main drivers of this performance. By the close on Friday, the ETF was showing a loss of 0.60%.
Merger Arbitrage Portfolio Performance Review
Cash merger arbitrage spreads as measured by the Merger Arbitrage Limited T20 Index declined during the week. The loss was in large part due to the reversal of the gains made by the previous period’s biggest winners, Sina Corporation (SINA) and Sogou (SOGO). Doubts over the closing timelines of these stocks have made them more susceptible to the effects of broader market movements.
There was one deal which closed during the week that involved a former T20 index constituent. Foundation Building Materials (FBM) was successfully consummated on Friday at the offer price of $19.25. There were no deal failures. Waddell & Reed Financial (WDR) which had been moving ahead in recent weeks saw its stock price move above the $25 offer price from Macquarie Group even when a dividend payment is taken into consideration. Subsequently, the stock is removed from the index. More spread details about this week’s index list can be found on our Spread Tracker page.
The T20 index closed down for the week by 0.54%. The index was comprised of a complete complement of 20 merger arbitrage cash deals. As expected with this negative performance, the winners were outpaced by the losers by a margin of 3 to 16 with 1 non-mover. The standard deviation of the individual index returns was 0.87%. This figure was surprisingly low considering the performance of the index. It is below the long term average but only marginally below the medium term average.
Merger Arbitrage Performance Review - January 31, 2021
Waddell & Reed Financial (WDR)
Waddell & Reed Financial was the stand out performer from the index this week as the broader market struggled. The stock has now traded upto and above the $25 offer price from Macquarie Group even when adding in the remaining expected dividend.
One SEC filing during the week reveals a 15.3% holding by Blackrock. However, the previous week there was a PREM14A filed which details the regulatory approvals required for successful consummation. CFIUS, HSR, FINRA and New Hampshire Banking Department Approval are all required. So far, only HSR has been granted. There is no date set for the Extraordinary general meeting although a date is expected to be announced soon.
Should these regulatory approvals delay the deal beyond the expected 2Q closing window, there could possibly be another (additional) dividend payment. This may explain the stock trading at a premium to the offer price.
Having advanced $0.21, or 0.84% during the week, the stock now trades at $25.29. With the offer being $25 per share, the merger spread stands at (0.16%) because of the dividend of $0.25 are expected to be paid. We have no position and are unlikely to initiate one in the near future.
SINA Corporation (SINA)
Champion laggard this week goes to Sina in complete reversal of the previous week (a common action for this stock). Despite no new deal news to report the stock became the worst performer in the index having rallied hard to close in on the $43 offer price from New Wave.
In light of our previous analysis
By the end of the week, the stock finished up $1.34 at $43.08, a rise of 3.21%. This leaves the simple spread at just 0.51%. We maintain our small positon in this stock but anticipate exiting the position during the coming week so as to take some money off the table and allow us the opportunity to renter should volatility return.
We were able to exit part of our position and now look to reenter during the coming week. As ever, we expect an announcement soon suggesting the completion of the deal is nigh, but have learnt not to sit idly waiting for such an event. By the end of the week, the stock finished down $1.26 at $41.82, a fall of 2.92%. This leaves the simple spread at 3.54%.
Sogou (SOGO)
Sogou also endured a reversal of fortunes this week. As with Sina, Sogou, which was the second best performer last week (to Sina) was the second worst performer this week. Volatile spreads of this nature, where the spreads are larger and the DCP is lower are more susceptible to the influences of the broader market movements.
On January 27, 2021, the registrant held its annual general meeting of shareholders in Beijing. A 6-K filing with the SEC reporting this fact however made no mention of the proposed acquisitions by Tencent.
There are greater risks involved in trading this spread and we urge traders to consider taking (at least) some profits should the opportunity arise. Especially if there has been little or no news. Our own purchase, with the benefit of hindsight has turned out to be a little premature but we continue to hold for the time being. By the close on Friday, the stock had finished lower by $0.23, at $8.27, a fall of 2.71%. This leaves the simple spread at 8.83%, and still the largest in the index.
Aerojet Rocketdyne (AJRD)
Aerojet Rocketdyne makes a rare second appearance in the leaders and laggards this week. Albeit at the wrong end of the spectrum (again). A previous research not from Jefferies suggests a higher offer is unlikely, and subsequently the stock has continued to drop back.
There was limited direct news regarding the acquisition this week. Investors much be diligent and not get caught up with articles from “content mills” which seem oblivious to the ongoing acquisition. One must also be aware of the special dividend of $5 which is also due to be paid when calculating the merger spread.
Following a previous drop, we initiated a small position in this stock which we maintain despite showing a small loss. By the end of the week, the stock finished down $0.47 at $52.04, a fall of 0.90% against an offer price of $51. This deal also includes a special dividend payment of $5.00. This leaves the simple spread at 8.42%, the second highest in the index.
