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