Top Merger Stocks Held By Fund Managers, Mid-Q2 2019

by: Special Situations and Arbs

Form 13F filings show fund managers' top arbitrage stocks.

Top M&A stocks of the 46 funds I follow.

Red Hat top pick of merger arbs.

Each quarter, I spend some time reading Form 13F filings from the hedge funds that specialize in merger arb, documenting, and analyzing which M&A stocks the funds have bought and which ones they haven't. I then compile the top 10 stocks held in these funds and share the results with the Seeking Alpha community.

My rules:

  • 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 vast majority of the positions are merger-related.

Of the 46 funds I track two stocks were held by at least 30 of them: Red Hat (RHT) and Celgene (CELG). Red Hat is in the midst of being bought by IBM (IBM) in a cash deal expected to close later this year. European approval is still needed. There is a 2.5% spread left and a 5% IRR which could be higher if the deal closes late 3rd quarter/early 4th quarter. 37 Funds were holding Red Hat at quarter's end, which is the highest for a stock since I have compiling this data.

Celgene is being bought by Bristol-Myers Squibb (BMY) for cash, stock and a tradeable CVR which could be worth $9 upon FDA approval of three drugs. If one of the drugs doesn't receive approval the CVR will be worthless. The deal is on a second request from the FTC and is expected to close in Q3. Celgene was in 32 of the 46 funds.

Top 10 Merger Arb Stocks held by Funds

1) Red Hat (RHT) Held by 37 Funds
2) Celgene (CELG) Held by 32 Funds
3) First Data (FDC) Held by 22 Funds
4) Spark Therapeutics (ONCE) Held by 19 Funds
5) Tribune Media Company (TRCO) Held by 18 Funds
6) Mellanox (MLNX) Held by 17 Funds
7) Worldpay (WP) Held by 16 Funds
8) Versum Materials (VSM) Held by 15 Funds
9) Luxoft Holding (LXFT) Held by 14 Funds
10) WABCO Holdings (WBC) Held by 12 Funds

When a fund makes an M&A stock its number one holding, it signals strong conviction that the deal will ultimately close. 11 funds have Red Hat as its top pick as of March 31.

Top Positions among the 46 Funds

Red Hat Top Position in 11 Funds
Celgene Top Position in 3 Funds
First Data Top Position in 3 Funds

Some arbitrage funds oversize their top positions. Recently percentages of some of the holdings have been eye popping, this quarter included. It should be noted that as of March 31,Versum had received a bid from Merck KGaA (OTCPK:MKGAF) of $48 per share, topping its previous definitive agreement to be sold to Entegris (ENTG). In early April Merck KGaA and Versum consummated the deal at $53 per share.

Oversized Holdings

Versum Materials 50% of a Fund
WABCO Holdings 46% of a Fund
Red Hat 46% of a Fund
Celgene 38% of a Fund


Professional M&A shops tend to have significant resources, staff and relationships with companies and regulators. So I continue to find that tracking where they are putting their money is worthwhile.

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 RHT, CELG, FDC, MLNX, VSM, ONCE, LXFT. 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.