With strong deal pipelines, the outlook for merger arbitrage remains positive.
Microsoft’s bid for Activision gaming company in an all cash deal worth $68.7 million has been the largest deal announcement as of January. The deal is currently trading at an unusually high spread of around 20% annuallyized with a market implied likelihood of closing of 60%, according Reny Mathew (senior regional consultant) and Thomas Macior, JT Fucigna (both senior regional directors and portfolio managers alternative investments), all of Westchester Capital Management.
The XLNX/AMD agreement was approved by Chinese regulators. This paved the way for completion and increased optimism for other deals that require Chinese Regulatory (SAMR). This has been a key performance driver in funds such as The Merger Fund MERIXAccording 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% on December 31, 2021.
The deal spreads remain very split between high probability outcomes that WCM seeks as well as those that have more uncertainty and higher levels 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 increasing during the month, Westchesters funds held strong and offered good returns relative other asset classes.
Westchester has always approached merger arbitrage and other event-driven areas from a conservative perspective. This allows Westchester to evaluate each deal on its merit and identify high-probability outcomes that offer clients maximum return per unit risk.
Westchester also seeks out to diversify away or hedge any exogenous dangers in its portfolio so that it’s return is almost entirely dependent on capturing a deal spread or risk premium for an event. Every investment the firm makes must have a date with fate and be publicly announced.
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