A Couple of Recently Completed Takeover Arbitrage Situations

Date Added: August 8, 2017 | Comments (0) | Filed under: Blog

Takeover arbitrage, also known as merger arbitrage, is an investment strategy that focuses on the successful completion of mergers and acquisitions. An investor that employs this strategy is known as an arbitrageur. Risk arbitrage is a type of event – driven investing in that it attempts to exploit pricing inefficiencies caused by a corporate event.  A couple of recent examples.

Example #1:

The Swiss firm Syngenta was the subject of an announced takeover bid from China’s ChemChina.  The bid was at $92.95 and one could buy the shares in the market for approximately $85 given the uncertainty of a shareholder vote, antitrust approvals, and the time value of money.  A dividend was also declared and paid.  The approximate 2 month holding period yielded us a 10% return which obviously annualizes out very  favourably.

Example #2:

Dominion Diamond Corporation (DDC) was rumoured to be the subject of acquisition interest from Montana based Washcorps, and started a strategic review process to maximize value for shareholders.  We bought shares of DDC at $12.49 USD, received a dividend, and after 4 months of holding a bid of $14.25 per share was announced (we sold our shares at $14.10 on the announcement of the bid) and closed with a 15% return (although for those converting CDN to USD and back, the recent CDN strength reduced that return).  Once again, a very favourably annualized rate of return.

A word of caution about takeover arbitrage.  In extreme market environments (financial crises for instance) what appears to be an uncorrelated investment strategy can become quite correlated to negative market action as deals tend to be cancelled in such an environment.  Therefore, one is best to consider the range of possible outcomes under a series of different scenarios.

Scott

*Merger arbitrage is a relatively sophisticated investment strategy and investors should seek the advice of a professional portfolio manager or their financial advisor before engaging in merger arbitrage. This blog is not a recommendation to engage in merger arbitrage.


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