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Merger Arbitrage Analysis And Spread Performance - February 10, 2019

Feb. 11, 2019 11:44 AM ETHIFR, IDTI, MNA, PACB, RHT, AHL4 Comments


  • Pacific Biosciences of California rebound provides cheer amongst the arbs.
  • CFIUS extended review of Renesas' purchase of Integrated Device Technology.
  • U.S. merger arbitrage cash spreads remain tight.

Deal Specifics

Aspen Insurance (AHL) reported results for the fourth quarter during the week and despite Chris O’Kane, Chief Executive Officer, commenting: “Aspen's fourth quarter 2018 results were impacted by the significant natural catastrophe activity that we witnessed across the industry during the period", the stock climbed 1.70% for the week. We suspect this is mainly due to what wasn't said during the report such as anything that may give grounds to invoke a MAC clause. The press release stated "the closing of the transaction is subject to closing conditions...as well as the maintenance of certain financial strength ratings by Aspen's subsidiaries". This, we believe encouraged the arbs to bid the price of AHL stock up to within 5 cents of the offer price at one stage and now leaves the spread at only 0.45%. With such little meat left on this bone we have exited our position. We are already looking to reenter should the stock pull back a little further.

Integrated Device Technology (IDTI) announced that CFIUS has extended its national security review of Renesas' purchase and is now expected to finish no later than March 22 instead of by February 5. Despite this drop the spread has only widened to 1.30%. We were expecting to see a larger movement than this as a delay not only lowers the annualised return but also affects the probability of deal closure. We do not believe the current spread accurately reflects these changes in circumstances. The market appears to maintain a reasonably confident approach and appears convinced this deal remains high quality. As the spread remains relatively tight we have refrained from taking a new position but remain ready to do so if the stock pulls back a little more.

This week’s stand out best performer in the merger arbitrage cash

This article was written by

Merger Arbitrage Limited is a successful Event Driven & Special Situations Investment fund. Along with the website Merger Arbitrage Limited the fund specializes in Merger Arbitrage (Risk Arbitrage). The investment process focusses on the following key elements i) Evaluation of relative risk/return characteristics ii) Time frame analysis iii) Entry/exit points This focus has resulted in multiple variants of the traditional merger arbitrage strategy each having their own unique characteristics. In concert, these strategies produce an attractive source of alternative beta with less risk than traditional plain vanilla merger arbitrage thus producing an attractive sharp ratio consistently above 2. The key areas listed above have been intensely researched and build extensively upon existing academic literature resulting in a series of proprietary algorithms. The primary geographic area of operation is (but not restricted to) the US and encompasses all deal types.

Analyst’s Disclosure: I am/we are long RHT, PACB. 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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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