The prospects for merger arbitrage remain positive with strong deal pipelines.
Microsoft’s bid to acquire Activision, a gaming company, in an all-cash deal worth $68.7billion, was the largest deal announced as of January. According to Reny Mathew, senior region consultant, and Thomas Macior (both senior directors and client portfolio managers alternative investment), the deal is currently trading at a unusually high spread of approximately 20% annuallyized, with a market implied probability closing of 60%.
Chinese regulators approved the XLNX/AMD transaction, paving the path to completion and providing more optimism for deals that need Chinese Regulatory (SAMR). This has been a key performance driver of funds such as The Merger Fund (MERIX).According to Mathew, Macior, Fucigna
Deal spreads have increased in the current environment and are attractive relative to other asset classes.
According to UBS, the average median spread was 6.7% higher than LIBOR on January 28th for deals with annualized spreads between 0%-30%. This compares to 4.4% as per December 31, 2021.
The spreads of deals continue to be very bifurcated between high-probability outcomes that WCM seeks, and those that are more uncertain and carry a higher level of risk.
Fucigna, Macior and Mathew have identified 10 deals with the highest annualized profits. These deals range from 369% in JOBS/Garnet Faith Limited (369%) to 29.97% in AZPN/EMR (29.97%), respectively.
Despite spreads expanding during the month Westchesters funds held firm and offered good returns relativeto other asset classes.
Westchester has been approaching merger arbitrage and the wider event-driven space with a more conservative approach. It seeks to evaluate each deal individually and identify high probability outcomes that offer clients a maximum return per unit of risk.
Westchester also seeks to diversify away from and/or hedge exogenous risk in the portfolio so that its return almost entirely depends on capturing the deal premium or deal spread of an event. Each investment made by the firm must be announced and date with destiny.
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