Pacific Biosciences plummets on Phase 2 clarification.
Acacia rises on settlement of intellectual property suit with Viasat.
Cash merger arbitrage spreads widen following specific stock declines.
This article explains the reasons behind the movement in a selection of the largest U.S. cash merger arbitrage spreads from the past week as calculated by Merger Arbitrage Limited. We analyze the attractiveness and profitability of each spread going forward and indicate the trading position or action we have taken or intend to take based upon the analysis given.
Pacific Biosciences of California continued its downward trend during the week. We now have an explanation for last weeks sell off. The stock tumbled this week by 10.27% onnewsthat the
Final report from the UK Competition & Markets Authority (CMA) … concluded that their planned tie-up will lessen competition
It was interesting to see the stock move by more than 10% before any official news announcement hit the market. Anyway, obviously this drop has hurt profitability considerably. Our strategy welcomes the increased volatility but we were surprised by the size of the drop following previous announcements on the issue.
In the meantime, any further negative news will probably result in a deal failure/abandonment on the part of Illumina (ILMN). We have calculated a floor price of around $4.60 should the deal break compared with an $8 a shareoffer. That will of course be further effected by any additional selling by the presence and exiting of the arbs. For this reason, we do not see any need to add to our position until further guidance is released.
The second major blow to merger arbitrage profitability this week came in the form of CIRCOR International. The stock declined 8.46% for the week on news that CRANE (NYSE:CR) willnot pursue the offerany further beyond the expiration of the tender offer on Friday night. This comes as a response from the CIRCOR board that the offer is insufficient and the refusal to engage in dialogue. The news initially sent the stock down towards $36 but recovered partly during the rest of the week. On Thursday, traders welcomed an announcement from the company that it is tosell its upstream oil & gas engineered valve businessand focus on core activities as previously stated. However, also on Thursday an announcement by GAMCO stated theirintention to tenderCircor their shares. This helped boost the stock price through Friday as some arbs speculated on the success of the tender offer. As the price remained below $39 against atender price of $48this is obviously a speculative position. At the time of writing, the outcome of the tender offer is unknown. Although either way the deal is seen as finished. We shall report any further news via out twitter feed.
Cypress semiconductor was another significant decliner during the week losing 0.93% at $22.28. The spread is now offering 8.03% against anoffer priceof $23.85 from Infineon (OTCQX:IFNNY). The widening of the spread during the week is despite positive deal news and further deal clarification. On Monday,Bank of America statedhow CY could drive 50%+ Infineon upside following a successful takeover. The news obviously reassured arbs of the necessity for the deal to succeed.
On Tuesday, the company filed aSchedule 14Astating the special meeting for the stockholders vote will be held on August 27th. Then on Thursday, the company also announced thewithdrawal and refilingunder the HSR premerger program. We assume this news was taken in a negative light as investors mused the possibility of HSR complications. However, the size of this spread is still attractive even when compared to the expected closing date of January 31, 2020. We maintain our position.
Acacia Communications was the best performer this week despite only increasing in price by 0.54%. The $0.35 increase leaves the spread at $5.25 or 8.11%. However, theexpected closure datefor this deal is given as the end of May next year. During the week, it wasannouncedthat Viasat won $49.3m in its intellectual property suit against Acacia although this had little effect on the stock price. Afilingby the company during the week also spelled out the benefits of the proposed takeover by Cisco (CSCO). We suspect the expected closing timeline to be overly generous. We will be looking to take a position in the stock in the very near future.
The broader market retreated from the recent highs during the week. News of escalating tensions in the Gulf has troubled energy stocks. Domestically the earnings season is about to get into full swing and investors will take guidance from these results further out. The S&P 500 ETF (NYSEARCA:SPY) finished down 1.171% for the week.
The IQ ARB Merger Arbitrage ETF (NYSEARCA:MNA) was almost unchanged. By Friday, the MNA ETF was up 0.13%. (You can read our analysis of the MNA ETF in the Strategy section at the Merger Arbitrage Limited website).
U.S. based cash merger arbitrage positions saw 7 advances and 11 declines this week with 2 non-movers. The top 20 largest cash merger arbitrage spreads as defined by declined by 1.02% and the standard deviation of returns was 2.90%. This is significantly above the level experienced during the last few weeks and the 3-month and long-term averages. The performance of the portfolio was attributed to the large declines in PACB and ONCE.
The top 20 discount spreads now offer an average of 8.52% due to the aforementioned declines made during the week. The T20 portfolio has 20 deals and 0 vacant spots filled by cash. The portfolio (available from the Merger Arbitrage Limited website) is once again becoming reliant on a handful of spreads for the high average return. This is signified by the widening of the PACB spread to more than 50%.
Once again, the apparent attractiveness of cash merger arbitrage spreads has become reliant on a handful of deals. We note however, CIRCOR will no longer feature in the coming week, as the tender offer will have expired prior to publication of this article. However, ONCE and Red Robin Gourmet Burgers (RRGB) along with PACB make up the majority of returns available. Decent returns further down the list however are available. For instance, Buckeye Partners (BPL) is offering 3.99% when two dividend payments of $0.75 are included.
Acacia Communications (ACIA) is a deal that we mentionedlast weekas a potential attractive opportunity. Closing is expected to be around the end of May next year. However, as the closing of the RHT deal demonstrated, accurate closing date predictions can enhance profitability significantly. We discuss deal-closing schedules in aseparate article.
Stocks with a lower Deal Closing Probability (DCP) are more susceptible to broader market movements. As we enter earnings season and with geo-political tensions on the rise we must be aware of the potential for profit taking as stock hover around all-time highs. We are approaching full investment in merger arbitrage and are now selectively (very) seeking our next investment. We maintain a positive outlook for the profitability of merger arbitrage but remain cautious about the overall profitability being reliant on a handful of spreads.
Merger arbitrage trading is not without risks. This strategy, although accessible to individuals as well as professionals, should be thoroughly understoodBEFOREinvestment capital is put at risk. To assist the reader, evergreen content such as how-to & introductory guides, a reading list and much more including a list of the largest cash merger arbitrage spreads currently available can be found at the Merger Arbitrage Limited website associated with the author of this article.
Disclosure:I am/we are long PACB, ONCE, CY.I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.