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Pacific Biosciences Of California - A Rare Merger Arbitrage Opportunity

|Includes: ILMN, Pacific Biosciences of California (PACB)
Summary

Large price gap.

High chance to close the deal in middle of 2019.

Pacific Biosciences of California (PACB)'s close price on Jan 30, 2019 is $6.80. ILMN announced to buy PACB last year, the deal close price is $8 cash. The deal is expected to close in middle of 2019. If the deal can be closed by 6/30/2019, the total gain is 17.6%. Consider it's only 5 month from now, its annual return is over 35%, which is quite amazing for merger arbitrage player in this market.

The price gap is largely due FTC's second request for clearing antitrust. Based on available data, PACB's revenue is only about 90 Million dollars per year, ILMN's annual revenue is more than 2 billion. There are also a few large DNA sequencer companies such as Roche, Agilent technology, Beckman etc, their revenue is a little smaller than ILMN, but much larger than PACB. Plus companies like Roche and Agilent Technology have a lot of resources, ILMN is not a monopoly and cannot be neither.

ILMN has more than 3 Billion cash on hand, this deal is only 1.1 B, so there's no financial concern at all.

PACB is a leader in long piece DNA sequencing technology, whereas ILMN is a leader in short piece DNA sequencing technology. This deal is not to kill a competition, but to compliment ILMN's technology. So it's very unlikely ILMN will drop this deal.

Recently in ILMN's conference call, ILMN is still very confident on the deal, and expect the deal will be close in middle of 2019. 

Based above analysis, I will put 90% chance for this deal's close.

In the worst case, if the deal cannot be closed, price falls back to $4. Your lose 2.80. If you calculate the odds and price move, this is still very favored for you.

90% x 1.2 + 10% x (-2.8) = 0.8

Which means you have more than 10% return if you keep doing this kind of arbitrage.

In this market, most merger deal has less than 1 % return, this deal is a rare good opportunity in terms of risk reward ration.

Disclosure: I am/we are long PACB.

Additional disclosure: In this time, I will add more shares gradually.