Institutional investment managers having an aggregate fair market value on the last trading day of any month of any calendar year of at least $100 million are required to file a report on Form 13F within 45 days after the last day of such calendar year and within 45 days after the last day of each of the first three calendar quarters of the subsequent calendar year. So in the middle of every quarter, I spend the better half of a day reading, compiling and analyzing the 13F's of the hedge funds that employ the merger arbitrage strategy either exclusively or predominately.
I note the arb stocks they own, the ones they don't and if they increased or decreased their positions in the current quarter. I then compile the top 10 stocks held in these funds and share it with the Seeking Alpha community.
- I only count a stock if it is at least 1% of the fund's portfolio.
- I only include stocks that are still actively trading.
- I only choose funds where the majority of positions are merger-related.
Groundhog Day is in February so it is fitting that this quarter's top arb stocks have a Groundhog Day feel to it. For the third consecutive quarter the same top two stocks are present in almost every fund's portfolio. NXP Semiconductors (NXPI) and Time Warner (NYSE:TWX) are again part of at least 30 of the 39 funds. Both stocks have had a long road to merger completion and neither is there yet.
NXPI agreed to be acquired by Qualcomm (QCOM) 480 days ago for $110 per share in cash. The deal is awaiting its final regulatory approval, with China expected to decide any day now. Meanwhile, NXPI's stock has traded above the 110 level since last summer with the market expecting Qualcomm to raise its bid in order to get the required 80% percentage to tender. Since the merger announcement, the semiconductor index has risen more than 50%.
Meanwhile, the proposed Time Warner/AT&T (T) tie up is five days older than Qualcomm/NXPI. 13 months after the deal was signed the Justice Department, in a surprise to many market observers, sued to block the merger. The trial is slated to begin on March 19. If AT&T prevails TWX shareholders will receive $107.50 per share, comprised of $53.75 per share in cash and $53.75 per share in AT&T stock, subject to a collar.
Top 10 Merger Arb Stocks held by Funds
|1) NXP Semiconductors||Held by 33 Funds|
|2) Time Warner||Held by 30 Funds|
|3) Monsanto (NYSE:MON)||Held by 22 Funds|
|4) Akorn (AKRX)||Held by 18 Funds|
|5) Scripps Networks Interactive (SNI)||Held by 18 Funds|
|6) Aetna (NYSE:AET)||Held by 18 Funds|
|7) Calpine (CPN)||Held by 17 Funds|
|8) Rockwell Collins (COL)||Held by 17 Funds|
|9) Tribune Media (TRCO)||Held by 17 Funds|
|10) Regal Entertainment Group (RGC)||Held by 15 Funds|
When a fund makes an arbitrage stock its top holding it signals a strong belief that the deal will ultimately close. Since I have been tracking the arb funds' holdings, which has been for more than a decade, no single stock has been the top pick of more funds than NXPI is now.
Top Positions among the 39 Funds
|NXP Semiconductors||Top Position in 13 Funds|
|Time Warner||Top Position in 3 Funds|
|Monsanto||Top Position in 3 Funds|
Some arb funds have continued to oversize their top positions. As of the end of Q4, there were six positions of 32% or more in a single stock.
|NXP Semiconductors||55% of a Fund|
|NXP Semiconductors||52% of a Fund|
|Monsanto||42% of a Fund|
|Time Warner||38% of a Fund|
|NXP Semiconductors||35% of a Fund|
|Monsanto||32% of a Fund|
While there is no substitute for doing one's own work and developing one's unique trading/investing style, looking at what some of the top hedge funds are doing with their money is quite valuable. These funds have more resources, staff and contacts that an individual investor can possibly have. As it pertains to M&A, it is wise to research the stocks held by these funds and see if they make sense as part of one's arbitrage portfolio or simply overall portfolio. I have done so for many years with success.
Author's note: If you enjoy merger arbitrage, tender offers, exchange offers, spin-offs, liquidations and odd lots, please consider following me by clicking on the "Follow" button on top of this page.
Disclaimer: The above article is intended to provide my opinion to interested readers. To the best of my knowledge, the information presented above is factual but its accuracy cannot be guaranteed. The article should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect my judgment as of the date of publication and are subject to change. Readers are strongly encouraged to complete their own due diligence on any stock or option mentioned in this article before investing. I have no knowledge of individual investor circumstances, goals, portfolio concentration or diversification. I am not a licensed investment adviser. The information contained in this article is provided for general informational purposes and is not a substitute for obtaining professional advice from a qualified person, firm or corporation. Merger arbitrage is a risky strategy because there is significant downside in the event of most deal rejections.
Disclosure: I am/we are long NXPI, MON, AKRX, SNI, RGC, TRCO, COL, CPN, AET. 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.