It's that time again, 13Fs, where major hedge funds reveal their public equity holdings. Harvard Management Company manages the $32 billion endowment for Harvard University. Harvard Management likes to play in the merger-arbitrage market, and the latest quarter was no different, see Harvard's 13F here. Many of Harvard's M&A plays are lesser known and out of the Wall Street spotlight; its largest holding is no different.
The deal offers Hudson shareholders 0.08403 M&T shares per Hudson share. The deal was first announced back in August 2012 and has been in the works ever since. It's expected to close during the fourth quarter of this year. The real benefit of the deal will include combining Hudson's retail presence and M&T's strong commercial banking business.
Based on the merger agreement, and M&T's current price, the deal would value Hudson shares at over $9.90 per share, upside of 3% to the stock. The upside, expected to be realized over a very short-time period (suggesting a near 7.5% annualized return), is quite appealing. However, in this stock-for-stock deal, investors are exposed to the M&T's stock price movement. Thus, for the merger-arbitrage play, be sure to short M&T shares (at a 1:1 ratio for the amount) to hedge against M&T shares falling.
In the meantime, it's business as usual for Hudson
The thing about Hudson is that it's not only a solid merger-arbitrage play, but it also appears to be a strong regional bank after going through restructuring during the past couple of years.
Hudson went through various restructurings leading up to 2012 and has emerged with a slimmer loan portfolio. Thanks to the smaller loan portfolio, interest income has been on the steady decline, but net charge-offs have also been on the decline. Charge-offs were down 23% in 2Q sequentially, allowing the company to release nearly $4 million in reserves for the quarter. What's more, Hudson's allowance for loan losses came in at $297 million, which covers over 25% of impaired loans.
The company holds all its own mortgages, no securitizing, and during the crisis, the company refused to take TARP money. At the end of 1Q, capital ratios were strong: leverage capital ratio was at 10.2% and tangible capital ratio at 10.09%. Further helping Hudson was the fact that it did not offer any sub-prime loans during the real estate boom.
From there it's more action on the M&A front
Harvard Management upped its shares owned of Stewart Enterprises (STEI) by over 400% last quarter to put the stock as its second largest 13F holding. For those of you unfamiliar, Stewart is a provider of funeral and cemetery products and services. Service Corporation has announced plans to snatch up Stewart for $13.25, 1.1% upside from current levels.
A couple of new picks for Harvard are also in the merger-arbitrage space, and make up the third and fourth largest positions of the 13F portfolio. These include Lufkin Industries (LUFK), making up 6.49% of the portfolio, and ExactTarget (ET), making up 5.28%. Both of these deals have already been completed.
All in all
Harvard likes to play the relatively low risk, low return merger-arbitrage game. The strategy can be fruitful for investors that can quickly analyze deals, to the extent that regulation and potential financing issues could impact the deal. While the M&T-Hudson deal has been in the works for over a year, thanks to a few hiccups early on related to regulations and money laundering concerns, but everything appears to be a go. Harvard's other key M&A play, Stewart, appears to only be offering investors modest upside, but the business model of Stewart and Service Corp is worth taking a look at for the long term -- as death is something we cannot live without.