This is the weekly Merger Arbitrage Performance Review – February 21, 2021. This report focusses on the performance of the SOGO, CHNG & MGLN merger arbitrage spreads during the period 16th February – 19th February. These stocks were selected from the weekly largest top 20 investable US cash based merger spreads that was available as at 14th February, 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 – February 21, 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 GLUU, LITE–COHR, CHNG, AJRD & TLRY–APHA.
Table of Returns
Merger Arbitrage Performance Review - February 21, 2021
| Merger Arbitrage Limited | The Market | ||
|---|---|---|---|
| Product | Weekly Change | Product | Weekly Change |
| T20 Index | 0.02% | SPY | 0.66% |
| Index Dispersion | 0.48% | VIX | 10.42% |
| Winners | 11 | MNA | 1.08% |
| Losers | 6 | ||
Market Performance Review
Equity markets yet again managed to hit fresh highs during the week as a number of recurring factors wielded their influence. Employment numbers came in slightly worse than expected but as the global vaccination program gathers path the expected recovery in the jobs market will outweigh any short term negativities. The latest stimulus package continues to be finalized giving support to the markets whilst the fallout of the meme stock trading frenzy gets the congressional hearings treatment as a bunch of politicians try to figure out just exactly what traders do for a living. (feel free to share this article on twitter and suggest your own answers).
By the close on Friday, the SPDR S&P 500 ETF (SPY) index fund had moved lower by 0.66%. Accordingly, the VIX responded by moving higher and by the end of the week was up 10.42%. The IQ Merger Arbitrage ETF (MNA) also had a negative week. Losses in Xilinx (XLNX) and Inphi (IPHI) were at the forefront of the decline. CIT Group however was able to deliver some positive performance. By the close on Friday, the ETF was showing a loss of 1.08%.
Merger Arbitrage Portfolio Performance Review
Cash merger arbitrage spreads as measured by the Merger Arbitrage Limited T20 Index juuuuust scraped into positive territory for the week. The gain was in large part due to the stand out performance of Sogou (SOGO). This overall gain was despite losses from Change Healthcare (CHNG) and Magellan Health (MGLN).
There were no deal closures during the week although Viela Bio (VIE) was removed as the spread narrowed considerably. More spread details about this week’s index list can be found on our Spread Tracker page.
The T20 index just managed to regain ground lost early in the week and closed up for the period by 0.02%. The index was comprised of a complete complement of 20 merger arbitrage cash deals. As expected with this performance, winners outpaced losers and had the upper hand by a margin of 11 to 6 with 3 non-movers. The standard deviation of the individual index returns was 0.48%. This figure is extremely low and is significantly below both the long term average and the medium term average continuing a steady decline over the last few months.
Merger Arbitrage Performance Review - February 21, 2021
Sogou (SOGO)
Sogou, which posted a healthy rise on Friday to close the week was the star performer this time round. This spread continues to be one of the most volatile cash merger arbitrage spreads of recent months providing a number of opportunities for multiple entries and exits. Spreads such as this, with a lower DCP, are also more susceptible to the influences of the broader market movements thus increasing spread volatility.
We had previously spoke of the risks of investing in this spread and stated
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.
In light of this, we have been actively trading this spread as part of our Active Arbitrage strategy. This is the repeated buying and selling of the same stock to take advantage of the spread volatility. We maintain a “core” position which we will hold until deal resolution, but in the meantime we will add to (or sell) stock as the price fluctuates.
By the close on Friday, the stock had finished higher by $0.11, at $8.37, a rise of 1.33%. This leaves the simple spread at 7.53%, and is no longer the largest in the index.
Change Healthcare (CHNG)
Champion of the laggards this week was Change Healthcare making its debut appearance in our weekly column. This is an all cash offer from UnitedHealth (UNH) for $25.75 per share. The deal is expected to close in 2H, 2021.
The reason for this week’s decline is found in an 8-K filing with the SEC regarding the HSR antitrust filing
On February 12, 2021, UnitedHealth Group, in consultation with Change, voluntarily withdrew its notification and report form, effective as of February 18, 2021, in order to provide the Agencies with additional time to review the transaction. Change expects UnitedHealth Group to re-file its notification and report form as soon as practicable following the effectiveness of such withdrawal, and in any event no later than February 22, 2021. If UnitedHealth Group re-files its notification and report form on February 22, 2021, the waiting period under the HSR Act will expire on March 24, 2021, unless earlier terminated or extended by a request for additional information and documentary material from the Agencies.
This announcement has caused investors to re-evaluate the success of the deal and convince some to redeploy their capital to deals that are presumed to have less risk. As the original expected closing timeline was in the second half of the year, the refiling would not be expected (at this stage) to extend this timeline.
Following this drop, we will look to initiate a position in this stock as despite the long expected closing timeline, the spread is now sufficiently wide. Should the spread subsequently narrow significantly however, we will look to bank some profits and take our money off the table. By the end of the week, the stock finished down $0.30 at $23.39, a fall of 1.27% against an offer price of $25.75. This leaves the simple spread at an attractive 10.09% and is the highest in our merger arbitrage index.
Magellan Health (MGLN)
The second biggest decliner in the index this week was also a new entry to our performance review column. Magellan Health (MGLN) was a deal announced in early January but the certainty of deal completion (high deal closing probability) has meant this spread has exhibited a low volatility from the start.
Although there was no new deal news announced during the week, it was reported that Engaged Capital had increased its stake. However, a DEFM14A filing late on Friday stated that March 31 will be the date of the extraordinary meeting.
By the close on Friday, the stock had finished lower by $0.74, at $93.24, a fall of 0.79%. This leaves the simple spread at 1.89%. Although this is a tight spread, the annualized return does look tempting if we can establish a position at these prices, especially with a short expected holding period. We shall look to initiate a position in the coming week.
