Selecting 2009 Merger Arbitrages Carefully

My assumption is that successful merger arbitrages will be hard to come by in 2009, quite simply because banks are unwilling to finance deals, companies are less willing to use their own cash and takeover prices will be reassessed, and most obviously, there is too much uncertainty.

Take a look at Puget Energy (PSD) and the 10% spread remaining. The risk of the deal failing is minuscule. Odds of 9-1 in my favor, yet the market is scared of something.

So this IS the good news. These conditions have widened the spreads of arbitrages starting September of 2008. Since I visit a list of pending mergers in the US regularly, I’ve definitely noticed the list getting shorter.

The following is a list of pending mergers as of Jan 8, 2009, courtesy of Merger Investing.

Symbol	Announced Date	Closing Value	Last Price	Closing Date	Profit	Annualized Profit
Zi (ZICA)	8/14/2008	$0.40	$0.46	Unknown	-13.04%	0.00%
Genentech (DNA)	7/21/2008	$89.00	$84.40	Unknown	5.45%	0.00%
Fonar (FONR)	11/14/2008	$5.00	$0.94	Unknown	431.91%	0.00%
NRG Energy (NRG)	10/19/2008	$26.43	$24.11	Unknown	9.62%	0.00%
Mag Silver (MVG)	12/2/2008	$4.54	$5.15	Unknown	-11.84%	0.00%
NitroMed (NTMD)	12/4/2008	$0.50	$0.40	Unknown	25.00%	0.00%
Tollgrade Communications (TLGD)	11/18/2008	$5.50	$5.18	Unknown	6.18%	0.00%
Cowen Group (COWN)	12/8/2008	$7.00	$6.47	Unknown	8.19%	0.00%
Crucell N.V. ADS (CRXL)	1/7/2009	$20.55	$23.00	Unknown	-10.65%	0.00%
Meadow Valley (MVCO)	7/28/2008	$11.25	$7.74	1/7/2009	45.35%	0.00%
Puget Energy (PSD)	10/26/2007	$30.00	$27.40	1/31/2009	9.49%	150.59%
Rohm & Haas (ROH)	7/10/2008	$78.00	$60.00	1/31/2009	30.00%	476.09%
Datascope (DSCP)	9/16/2008	$53.00	$52.65	1/31/2009	0.66%	10.55%
NDS (NNDS)	8/14/2008	$63.00	$57.00	2/2/2009	10.53%	153.68%
Emageon (EMAG)	10/13/2008	$2.85	$1.96	2/11/2009	45.41%	487.47%
Landry's Restaurants (LNY)	6/16/2008	$13.50	$12.75	3/31/2009	5.88%	26.18%
Castlepoint Holdings (CPHL)	8/5/2008	$15.64	$13.76	3/31/2009	13.65%	60.77%
American Cmnty Bancshare (ACBA)	9/10/2008	$11.34	$10.21	3/31/2009	11.11%	49.47%
Centerplate (CVP)	9/19/2008	$2.50	$2.09	3/31/2009	19.62%	87.32%
Innotrac (INOC)	10/6/2008	$3.45	$1.99	3/31/2009	73.19%	325.80%
Sovereign Bancorp (SOV)	10/13/2008	$3.09	$3.03	3/31/2009	2.11%	9.37%
Zygo (ZIGO)	10/16/2008	$7.15	$7.12	3/31/2009	0.46%	2.05%
Republic First Bancorp (FRBK)	11/10/2008	$9.26	$8.69	3/31/2009	6.51%	28.97%
Transmeta (TMTA)	11/17/2008	$18.70	$18.69	3/31/2009	0.05%	0.24%
Image Entertainment (DISK)	11/20/2008	$2.75	$1.80	3/31/2009	52.78%	234.93%
Mentor (MNT)	12/1/2008	$31.00	$30.95	3/31/2009	0.16%	0.72%
Wavecom (WVCM)	12/2/2008	$11.53	$11.17	3/31/2009	3.22%	14.35%
American Land Lease (ANL)	12/10/2008	$14.20	$13.84	3/31/2009	2.60%	11.58%
Scopus Video Networks (SCOP)	12/23/2008	$5.62	$5.45	3/31/2009	3.12%	13.88%
Indevus Pharmaceuticals (IDEV)	1/5/2009	$4.50	$5.38	3/31/2009	-16.36%	-72.81%
Minrad (BUF)	12/22/2008	$0.12	$0.11	3/31/2009	9.09%	40.47%
Embarq (EQ)	10/27/2008	$39.31	$37.99	6/30/2009	3.46%	7.30%
Centennial Communications (CYCL)	11/7/2008	$8.50	$8.17	6/30/2009	4.04%	8.52%
American Bancorp N J (ABNJ)	12/15/2008	$12.02	$11.93	6/30/2009	0.76%	1.60%
Provident Bankshares (PBKS)	12/19/2008	$8.46	$8.29	6/30/2009	2.06%	4.35%
Abigail Adams National Bancorp (AANB)	1/2/2009	$3.26	$3.01	6/30/2009	8.19%	17.28%
thinkorswim Group (SWIM)	1/8/2009	$8.67	$8.34	6/30/2009	4.00%	8.43%

The spreads have closed on many of them since 2008 but there are some where the spread seems to be due to an overreaction.

One merger I started looking into today was EMAG. There is a 45% spread and most would immediately believe the deal to fail, but some other details and the contrarian in me tells me that this is an interesting play.

ROH is another potential deal and we know that Dow Chemical (DOW) wants the merger. With a 30% spread, the recent pullout by Kuwait could actually have been a good thing IF the price is not lowered.

Disclosure: I hold PSD at time of writing.

Comments

[Sonoran:]

MVCO is a done deal.

Feb 10 02:14 PM

[Sonoran:]

MVCO is a done deal.

Feb 10 02:15 PM

[William H J...:]

Looks like DISK most likely is gonna happen?

www.stockdata.org/2009.../

Feb 13 03:32 PM

[Violent Cap...:]

screw DISK, those guys have been trying to make a transaction happen for the last 2 yrs, it looks pretty but the way their handling it is anything but.

I'd rather take the PBKS arbitrage position and boost it using options. I think the market is expecting a higher bid I guess, but there's clear disconnect between the stock market and the options market!

With MTB already scheduling plans, it looks like a done deal - 8%+ return in 2 months is nothing to complain about-

Apr 17 10:26 AM