Merger Arbitrage Opportunity: Merck's Deal With Sirna Therapeutics

 |  Includes: MRK, RNAI-OLD
by: Elias Tsepouridis

Here is a merger arbitrage opportunity for my short-term portfolio. The players are Merck & Co. (NYSE:MRK) and Sirna Therapeutics Inc. (RNAI-OLD).

The reason I am entering into this short-term trade for my are as follows:

- Successful completion of anti-trust filings

- Very minimal risk in not obtaining RNAI shareholder approval

- Announced closing date range of late December 2006 to early January 2007 provides nice short-term window.

On December 14th, 2006 Merck and Sirna announced that the federal regulatory antitrust waiting period has expired for Merck's $1.1 billion acquisition of Sirna. The Hart-Scott-Rodino anti-trust waiting period is one of the major hurdles that an acquisition most overcome to close successfully. As this deal passes this hurdle, I see only one other major hurdle: Sirna shareholder approval.

RNAI 1-yr chart


Looking at the original terms or the acquisition, what shareholder would say no to this transaction...

On October 30th, 2006 Merck agreed to pay $13.00 per share in an all cash transaction for Sirna, that is a 102% premium that Merck ponied-up for this deal. Also, as in most merger stock charts, you will see that the price has been pegged around the $12.90 range since the announcement. This is primarily driven by all of the merger arbitrage trading that Sirna is experiencing, resulting in a higher probability of shareholder approval.

If you are unfamiliar with merger arbitrage, there are many variations. Here is the definition of what my trade is trying to accomplish:

A merger arbitrageur looks at the risk of the merger deal not closing on time or at all. Because of this slight uncertainty the target company's stock will typically sell at a discount to the price that the combined company will have when the merger is closed. Merger arbitrageurs care only about the probability of the deal being approved and how long it will take the deal to close.

Details of the trade:

Purchase 1,933 shares @ 12.93 for $25,003 which includes $10 commissions.

Upon deal closing, this trade will provide a profit of $125.30 or 0.5% profit.

I know this return is not very exciting, but I am in the investing game to capture a slight edge, and this is it.

Depending on how many days it takes for the deal to close, it will impact your Annual Percentage Rate calculation. Here are 3 scenarios:

Bull Case - Deal closes on 12/26/2006 yielding an APR of 11.4%
Base Case - Deal closes on 01/05/2007 yielding an APR of 6.0%
Bear Case - Deal closes on 01/15/2007 yielding an APR of 4.0%

Please note, APR calculations are based off of a 250-day calendar.

Disclosure: Author has no position in RNAI.