Merger Arbitrage Spread Performance - 23 December 2018

by: Malcolm Spink, CFA

Top twenty US based merger arbitrage cash spreads.

This week’s best performer was NxStage Medical, Inc. (NXTM) gaining 1.23%.

This week's worst performer is Rent-A-Center Inc (RCII) down 10.01%.

The performance of the overall portfolio however was a disappointing negative 1.39%.

This is the performance and analysis update of the top 20 US based cash merger arbitrage spreads for the week ending 23rd December. Included in this week's report are the winners, losers and overall performance of the portfolio. We've also highlighted any deal completions or failures and changes to the list of the top 20 spreads for the coming week beginning 24th December.


This week’s best performer was NxStage Medical, Inc. (NXTM) gaining 1.23%, a rebound from last weeks worst performer status. Its deal to be acquired by Fresenius Medical Care has had a rollercoaster ride of late and provides an opportunity for actively trading the spread for those able to stay abreast of market developments. Belmond (NYSE:BEL) also performed strongly, up 1.18%. At one point during the week this stock was 1% above its offer price from Louis Vuitton Moet Hennessey as traders speculated on the possibility of a higher bid. Electro Scientific Industries (ESIO) was up 0.67% after Mr. John T C Lee (president of MKS, the acquirer) reiterated the anticipated closure of the deal in Q1 2019 and the appointment of a new vice president for ESI. Naturally, arbs looking for a "sure thing" won't find many better than this but the spread is already priced accordingly. Finally, Integrated Device Technology Inc (IDTI) was up 0.54%, which on Wednesday received clearance from the State Administration for Market Regulation of the People’s Republic of China (“SAMR”), for its merger with Renesas Electronics Corp. The completion of this important step removes a potential significant roadblock in merger completion and has encouraged a large increase in the number of arbs participating in the deal. With the spread still offering 1.5% this looks to be an attractive situation.


This week's worst performer is Rent-A-Center Inc (RCII) down 10.01%. This loss was caused by RCII decision to terminate the deal with Vintage Capital Management. However, immediate broker upgrades following this announcement have pushed the stock ABOVE the offer price by the end of the week despite no longer being considered a merger arb play. Another significant loser (again) this past week was Essendant Inc (NASDAQ:ESND), down 3.98% as it once again extended its tender offer from Staples for another week. Also significantly in the red was Arris International (ARRS) down 3.94% having announced a shareholder meeting to take place on the 1st February 2019 to vote on the proposed deal from Commscope Hldg Co Inc Com. Avista Corp (AVA) was also down 2.53%, following its filing of a request (along with acquirer HydroOne) for reconsideration of denying state approval of the deal. This deal, whilst technically remaining live is now a highly speculative situation and is best traded by those with specialist knowledge of the legal situation. Others losers of note were Athenahealth (NASDAQ:ATHN) down 1.82%, (acquirer Veritas Capital & Evergreen Coast Capital), Redhat (NYSE:RHT) (acquirer International Business Machines) down 1.78%, and Travelport down 1.53% (acquirer Siris Capital Group, LLC and Evergreen Coast Capital).

Portfolio Performance

Losers thoroughly outpaced winners this week by 15 to 5. The performance of the overall portfolio reflects this score but needs further explanation. During the week, the collapse of the RCII deal should require an immediate sale of the stock as per the portfolio composition rules. Using the closing price that same day the portfolio return is a very negative 1.39%. However, for those who continued to hold the stock until the end of the week the overall portfolio performance is negative 0.75%. There were no dividends paid during the week from the T20 list. The standard deviation of returns for the T20 was 1.67%. This is an out sized movement reflecting the volatility in the market and specific deal situations. The MNA ETF returned a negative performance of 1.32%, continuing a 5 week losing streak. The S&P 500 ETF, SPY which suffered a large sell-off on Friday, but also went ex-div to the tune of $1.435, endured yet another losing week and posted a huge loss of 7.04%. The VIX accordingly increased dramatically by 39.2%.

*We have not included MRGR ETF for liquidity reasons. Liquidity and other factors affecting the performance of these products are discussed in our Merger Arbitrage ETF Review.

Disclosure: I am/we are long ARRS, RHT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.