Four of my favorite times of the trading year are the days that Form 13F filings are released. Those filings give all investors and traders a chance to see what the big money is buying, selling or holding. In particular I am interested in the funds that invest largely in M&A stocks. I track 42 of those funds, and each quarter compile a list of the top 10 arb stocks and share it here on Seeking Alpha.
- 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.
Celgene (CELG) is by far the most sought after M&A stock these days. Bristol-Myers Squibb (BMY) is buying Celgene in a cash and stock and CVR deal. If completed, the tie-up will be the largest pharmaceutical industry merger ever. 36 of the funds have it in their portfolio as of June 30. It is also my largest position and I recently wrote about it in-depth here. HSR approval is still needed but BMY has offered to divest Celgene's psoriasis treatment Otezla to ease concerns raised by the FTC. The companies expect to close late in the year or early in 2020.
Another large biotech merger is in the number two slot. Seven weeks ago, AbbVie (ABBV) signed a deal to acquire Botox owner, Allergan (AGN) also in a cash and stock deal. The market has punished ABBV so far as well as BMY. But a traditional stock or stock and cash combo deal needs closing not necessarily price improvement in the acquirer. Closing is expected early next year.
Top 10 Merger Arb Stocks held by Funds
|1) Celgene (CELG)||Held by 36 Funds|
|2) Allergen (AGN)||Held by 24 Funds|
|3) Zayo Group Holdings (ZAYO)||Held by 23 Funds|
|4) Versum Materials (VSM)||Held by 19 Funds|
|5) WABCO Holdings (WBC)||Held by 18 Funds|
|6) WellCare (WCG)||Held by 17 Funds|
|7) Spark Therapeutics (ONCE)||Held by 17 Funds|
|8) Tribune Media Company (TRCO)||Held by 16 Funds|
|9) Mellanox (MLNX)||Held by 15 Funds|
|10) Caesars Entertainment (CZR)||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. 5 funds had Celgene as its top pick at the end of Q2. (Many of the funds had Red Hat (RHT) or Anadarko Petroleum (APC) as their top pick but those deals have already closed so I don't include them.)
Top Positions among the 42 Funds
|Celgene||Top Position in 5 Funds|
|Altaba (AABA)||Top Position in 2 Funds|
Some arbitrage funds concentrate their top positions. To put a fifth of one's portfolio in one stock, one must have great conviction in the deal closing. Below four fund managers are holding a single stock which make up 20% or more of their portfolio.
|Celgene||38% of a Fund|
|Cypress Semiconductor (CY)||29% of a Fund|
|Versum Materials||20% of a Fund|
|WABCO Holdings||20% of a Fund|
Professional M&A shops tend to have significant resources, staff and relationships with companies and regulators. Following the money has helped make me money over the years and also avoid some potholes. I expect that to continue.
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.
Disclosure: I am/we are long CELG, AGN, ZAYO, VSM, ONCE, MLNX, CZR, CY. 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.
Additional disclosure: 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.