Top Merger Stocks Held By Fund Managers, Mid-Q2 2022

May 16, 2022 11:36 PM ETATC, HALO, ATVI, CCMP, COHR, CTXS, FHN, FHN.PB, FHN.PC, FHN.PE, MTOR, NLSN, ORCL, FULT, PLAN, SRRA, TTWO, VG, WBT20 Comments5 Likes

Summary

  • Form 13F filings show fund managers' top merger arbitrage stocks.
  • Top M&A stocks of the 31 funds I follow.
  • Cerner the top merger arb stock.
Top view of business office workstation with M&A letters or merger and acquisition

Atstock Productions/iStock via Getty Images

Four times a year, I spend several hours looking through Form 13F filings from the hedge funds that specialize in merger arbitrage. I document and analyze which merger stocks the funds have bought and which ones they haven't. I then compile the top 10 stocks held in these funds and share it with our 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.

The Top Two

Cerner Corporation (CERN) is the top stock appearing in 26 of the 31 funds. Oracle (ORCL) is in the process of buying Cerner for $28.3 billion which works out to $95 in cash. The merger is structured as a tender offer and it expires June 6 though it can be extended if all regulatory approvals aren't satisfied. Cerner is a leader in the field of software and information systems used in hospitals and healthcare systems. The deal has cleared HSR but still needs EU approval. European regulators have set a provisional deadline of June 1. Cerner's stock has been super strong in the recent ugly tape.

Zynga (ZNGA) is in 19 of the funds. The videogame company is being bought by the larger Take-Two Interactive (TTWO) in a cash and stock deal. Upon closing, Zynga shareholders will receive $3.50 plus .0406 TTWO shares. Potential antitrust issues were possible in delaying the merger but HSR expired in February. All that remains is the shareholder vote on Thursday with closing expected after trading the following day.

Top 10 Merger Arb Stocks Held By Funds

1) Cerner Held by 26 funds 9% IRR
2) Zynga Held by 19 funds 32% IRR
3) Activision Blizzard (ATVI) Held by 18 funds 24% IRR
4) Anaplan (PLAN) Held by 18 funds 22% IRR
5) Coherent (COHR) Held by 17 funds 31% IRR
6) Nielsen (NLSN) Held by 16 funds 33% IRR
7) Vonage (VG) Held by 15 funds 88% IRR
8) Citrix Systems (CTXS) Held by 14 funds 29% IRR
9) First Horizon Corp (FHN) Held by 12 funds 20% IRR
10) CMC Materials (CCMP) Held by 12 funds 12% IRR

When a fund makes an M&A stock its number one holding, it signals strong conviction that the deal will ultimately close. Nine funds had Cerner as its top pick as of the end of the first quarter.

Top Positions Among The 30 Funds

Cerner Top Position in 9 Funds
Activision Blizzard Top Position in 2 Funds
Anaplan Top Position in 2 Funds

Some arb funds oversize the positions that they have great conviction in. As of the end of Q1, there were four positions of 23% or more in a single stock.

Oversized Holdings

Cerner 54% of a Fund
Cerner 39% of a Fund
Welbilt (WBT) 23% of a Fund
Citrix Systems 23% of a Fund

Selected stocks that arb funds have high percentage ownership in

Atotech limited (ATC) 13.1%
Atotech limited (ATC) 10.1%
Antares Pharma (ATRS) 7.7%
Prudential Bancorp (PBIP) 5.3%
Sierra Oncology (SRRA) 5.3%
Prudential Bancorp (PBIP) 5.2%
Antares Pharma (ATRS) 5.2%
Meritor (MTOR) 4.9%

Conclusion

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 arb 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.

While there is no guarantee that the above deals will close, the fact is more than 90 percent of all mergers do close and when the specialists allocate their money to an arb position the odds even get better.

This article was written by

I am an experienced individual investor who has been trading merger arbitrage stocks and options since the 90's. I am a writer with a Master of Science from Northwestern University and I truly enjoy writing articles about the stock market. I try to look for opportunities where the odds are in my favor and there is a definite edge. On Seeking Alpha my articles will aim to provide insight and favorable risk/reward for the readers.However, I am not an investment advisor so any recomendations or ideas I write about in my articles, blogs, or comments shouldn't be taken as investment advice. I recommend using my writings as a starting point to which you should add your own research or that of an investment advisor. "Any time you make a bet with the best of it, where the odds are in your favor, you have earned something on that bet, whether you actually win or lose the bet. By the same token, when you make a bet with the worst of it, where the odds are not in your favor, you have lost something, whether you actually win or lose the bet." -David Sklansky, "The Theory of Poker"
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Disclosure: I/we have a beneficial long position in the shares of ZNGA, FHN either through stock ownership, options, or other derivatives. 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.

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