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How to invest in Merger Arbitrage?
Over the last 5 years:
👉 241 M&A cases analyzed and posted on SSI.
👉 Win rate of 79%.
👉 Average IRR at 35%+.
👉 Average holding period 2.6 months.
How did we achieve this?
A detailed guide in the thread below 👇
How to invest in Merger Arbitrage?
Over the last 5 years:
👉 241 M&A cases analyzed and posted on SSI.
👉 Win rate of 79%.
👉 Average IRR at 35%+.
👉 Average holding period 2.6 months.
How did we achieve this?
A detailed guide in the thread below 👇
2/
To make it easier we compiled a checklist identifying the most important questions to ask when analyzing any merger situation.
Click the image to get a full view 👇
To make it easier we compiled a checklist identifying the most important questions to ask when analyzing any merger situation.
Click the image to get a full view 👇
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In a sense, merger arbitrage is the same value investing, just with a short-term catalyst - understanding the business case, valuation of the target, the strategic rationale as well as buyers' motivation for the merger are all vitally important.
In a sense, merger arbitrage is the same value investing, just with a short-term catalyst - understanding the business case, valuation of the target, the strategic rationale as well as buyers' motivation for the merger are all vitally important.
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You need to be selective and only bet on those arbitrage cases that you have spent substantial time analyzing and believe that the expected returns outweigh the involved risks.
You need to be selective and only bet on those arbitrage cases that you have spent substantial time analyzing and believe that the expected returns outweigh the involved risks.
5/
Each year, hundreds of M&A deals are being done in the US alone.
How do you filter all of that to a few dozen potentially attractive ones, that you will have time to investigate?
$GOOG $FIT $MSFT $ATVI $CHNG $TSEM
specialsituationinvestments.com/2020/01/fitbit…
Each year, hundreds of M&A deals are being done in the US alone.
How do you filter all of that to a few dozen potentially attractive ones, that you will have time to investigate?
$GOOG $FIT $MSFT $ATVI $CHNG $TSEM
specialsituationinvestments.com/2020/01/fitbit…
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The first thing is to eliminate large-cap transactions and to look only at cases with spreads of 10% or more.
The first thing is to eliminate large-cap transactions and to look only at cases with spreads of 10% or more.
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Large-cap mergers tend to be priced efficiently by the market and it is difficult to find an edge. And single-digit spreads might not be worth your time given very limited upside and a similar amount of work required (exception: bidding wars).
Large-cap mergers tend to be priced efficiently by the market and it is difficult to find an edge. And single-digit spreads might not be worth your time given very limited upside and a similar amount of work required (exception: bidding wars).
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Assessing the potential downside in case the deal breaks is also crucial - in some cases, this might be the core reason behind the wide spread (a kind of "what if" risk), even if all other aspects of the situation look great.
E.g. $ATHM / $ICQ.AX - specialsituationinvestments.com/2021/07/icar-a…
Assessing the potential downside in case the deal breaks is also crucial - in some cases, this might be the core reason behind the wide spread (a kind of "what if" risk), even if all other aspects of the situation look great.
E.g. $ATHM / $ICQ.AX - specialsituationinvestments.com/2021/07/icar-a…
9/
The last closing price before the merger announcement (or rumors) might serve as an indicator of likely downside. But it is important to also take into account any post-announcement events (e.g. earnings report or industry/per trends).
The last closing price before the merger announcement (or rumors) might serve as an indicator of likely downside. But it is important to also take into account any post-announcement events (e.g. earnings report or industry/per trends).
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This is pretty straightforward for all cash transactions, but a bit more complex for stock considerations due to required hedging.
This is pretty straightforward for all cash transactions, but a bit more complex for stock considerations due to required hedging.
11/
Post-announcement events can sometimes drastically change the downside scenario.
e.g. $TEDU - where the company was hit by an industry-wide regulatory change, making the pre-announcement trading levels completely irrelevant.
specialsituationinvestments.com/2021/06/tarena…
Post-announcement events can sometimes drastically change the downside scenario.
e.g. $TEDU - where the company was hit by an industry-wide regulatory change, making the pre-announcement trading levels completely irrelevant.
specialsituationinvestments.com/2021/06/tarena…
12/
For arbitrage trades that require hedging, it's very important to check the borrow availability and fees. In some cases, hedging might be impossible and in others, hedging costs might consume a large part of the spread.
E.g. $GROY / $ELY specialsituationinvestments.com/2021/07/ely-go…
For arbitrage trades that require hedging, it's very important to check the borrow availability and fees. In some cases, hedging might be impossible and in others, hedging costs might consume a large part of the spread.
E.g. $GROY / $ELY specialsituationinvestments.com/2021/07/ely-go…
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The next thing is to make sure you understand “what’s going on here” - what is the merger rationale and what are the buyer’s incentives. Is this a strategic buyer or a financial? How credible is the buyer, what is its track record/background?
The next thing is to make sure you understand “what’s going on here” - what is the merger rationale and what are the buyer’s incentives. Is this a strategic buyer or a financial? How credible is the buyer, what is its track record/background?
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It’s always a positive if the buyer already owns a significant stake in the company or has been a long-time shareholder. It gives confidence that the buyer knows the business/industry well and will not walk away easily.
e.g. $CNR - specialsituationinvestments.com/2022/02/corner…
It’s always a positive if the buyer already owns a significant stake in the company or has been a long-time shareholder. It gives confidence that the buyer knows the business/industry well and will not walk away easily.
e.g. $CNR - specialsituationinvestments.com/2022/02/corner…
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Even if the arbitrage looks very compelling from all other aspects (rationale, spread, approval risk) the shady background of the buyer is a complete dealbreaker.
e.g. $INP.V (credits to @Writser for digging up fraud history of the buyer).
specialsituationinvestments.com/2020/08/input-…
Even if the arbitrage looks very compelling from all other aspects (rationale, spread, approval risk) the shady background of the buyer is a complete dealbreaker.
e.g. $INP.V (credits to @Writser for digging up fraud history of the buyer).
specialsituationinvestments.com/2020/08/input-…
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In the ideal scenario, several buyers might be circling around a company and simple merger arbitrage might develop into a bidding war. Bidding wars are great not only because of new higher offer prices but also because of the downside protection by the previous bid.
$BHP $RRD
In the ideal scenario, several buyers might be circling around a company and simple merger arbitrage might develop into a bidding war. Bidding wars are great not only because of new higher offer prices but also because of the downside protection by the previous bid.
$BHP $RRD
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For most arb cases spread exists either due to shareholder or regulatory approval risks.
Re shareholder approval key questions to answer are:
- required approval threshold?
- major shareholders?
- have any support agreements been signed?
- any opposing shareholders?
For most arb cases spread exists either due to shareholder or regulatory approval risks.
Re shareholder approval key questions to answer are:
- required approval threshold?
- major shareholders?
- have any support agreements been signed?
- any opposing shareholders?
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Assessing the adequateness of the offer (i.e. does it value the company high enough), might help determine the likelihood of shareholder approval. Comparison to public peers, recently made similar transactions, historical trading levels usually play a big role.
Assessing the adequateness of the offer (i.e. does it value the company high enough), might help determine the likelihood of shareholder approval. Comparison to public peers, recently made similar transactions, historical trading levels usually play a big role.
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Strong valuation support helps to maintain confidence in situations where the target rejects the initial bid, or the risk of shareholder rejection is high. It allows you to weigh the chance that the buyer will raise the price to appease management/shareholders.
Strong valuation support helps to maintain confidence in situations where the target rejects the initial bid, or the risk of shareholder rejection is high. It allows you to weigh the chance that the buyer will raise the price to appease management/shareholders.
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Regarding regulatory approval - the most common types of needed approvals are from the competition watchdog (antitrust) and foreign investment regulatory body (CFIUS). For smaller mergers, these are usually not a problem (unless it's in the defense sector).
Regarding regulatory approval - the most common types of needed approvals are from the competition watchdog (antitrust) and foreign investment regulatory body (CFIUS). For smaller mergers, these are usually not a problem (unless it's in the defense sector).
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For larger-cap names, regulatory risk is often accurately reflected by the spread. However, with smaller names sometimes there are exceptions.
Or, $SOLY $ABBV Where the market was very clearly overestimating the antitrust approval risk - specialsituationinvestments.com/2021/11/solito…
For larger-cap names, regulatory risk is often accurately reflected by the spread. However, with smaller names sometimes there are exceptions.
Or, $SOLY $ABBV Where the market was very clearly overestimating the antitrust approval risk - specialsituationinvestments.com/2021/11/solito…
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Or $UQM / Danfoss - a deeper look at the CFIUS review requirement showed that the foreign investment watchdog is very unlikely to block it.
specialsituationinvestments.com/2019/06/uqm-te…
Or $UQM / Danfoss - a deeper look at the CFIUS review requirement showed that the foreign investment watchdog is very unlikely to block it.
specialsituationinvestments.com/2019/06/uqm-te…
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All of the points mentioned above are generally very important for all merger arbitrage situations. And if the merger arbitrage idea has passed these checkpoints, there’s a good chance you’re onto something interesting.
All of the points mentioned above are generally very important for all merger arbitrage situations. And if the merger arbitrage idea has passed these checkpoints, there’s a good chance you’re onto something interesting.
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However, the key is not to blatantly go through the checklist, but keep an open mind and sometimes, the research might lead up to pretty unexpected conclusions.
e.g. this beautifully reversed arbitrage thesis by @puppyeh1 on $CSPR.
However, the key is not to blatantly go through the checklist, but keep an open mind and sometimes, the research might lead up to pretty unexpected conclusions.
e.g. this beautifully reversed arbitrage thesis by @puppyeh1 on $CSPR.
https://twitter.com/puppyeh1/status/1482523684694753281
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For our full guide on merger arbitrage investing, see here: specialsituationinvestments.com/2020/09/guide-…
For our full guide on merger arbitrage investing, see here: specialsituationinvestments.com/2020/09/guide-…
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