Mergers may become easier. Here’s the “Arb” stock to watch.

United Health Group
‘s

$13 billion acquisition of a health technology company

health care change

It’s a move, after a federal judge ruled against the Justice Department’s antitrust appeal of the deal — and there are other merger deals that could get the green light in the coming months.

Change stock (stock ticker: CHNG) jumped about 7% last Tuesday and Wednesday, to $27.21. That’s a hair below the acquisition price of $27.75 a share in cash. The stock has traded largely between $20 and $24 since the deal was struck, reflecting investors’ collective uncertainty about whether or not it will close. UnitedHealth struck a deal with Change way in January 2021 and the Biden administration sued to block the deal in February 2022.

Those who bought the stock change and bet on the deal that eventually closed can reap the difference soon. It is an example of a strategy called consolidation balancing, which provides a return opportunity that is not correlated with stock market direction or interest rates.

Most M&A targets see their stock price rapidly converging with the buyer’s offer. For example, shares of an insurance company

the rich

(Y) recently traded at approximately $842.85 per share, against the all-cash acquisition price of $848.02 agreed with

Berkshire Hathaway

(BRK.A, BRK.B). This is a discount of less than 1% of the value of the transaction.

But when there is uncertainty surrounding a transaction—perhaps due to an antitrust challenge, concerns about financing, or significant shareholder opposition—the target’s shares may trade at a significant discount to the agreed-upon price. It leaves an opportunity for investors willing to take the risk of closing the deal.

Not all of these risks are worth the risk. The most popular merger arbitrage opportunity these days exists

Twitter

(TWTR), which is fighting in court to force Elon Musk to buy the social media company for $54.20 a share, or about $44 billion. Twitter’s stock was trading at $41.60 on Wednesday, 30% below its transaction price.

This is hard to stop. Musk is not your average buyer, and the risk to the stock is high should the deal fail. Ago

Tesla

Co-founder (TSLA) publicly disclosed a 9.2% stake in Twitter on April 4, shares are up 6% — versus a 20% loss for Nasdaq Composite and down 35% and 70% for social media competitors

meta pads

(META) and

Explode, Explode

(pop, explode). It’s fair to say that Twitter stock would be a lot lower today were it not for Musk’s potential bid.

target/pointer Possessor / Pointer target share price bargain price Merger return to employers Transaction value (Bill) Deal type Announcement date
Spirit Airlines / Save JetBlue Airways / JBLU USD 22.40 $33.50 49.6% $3.8 monetary 7/28/2022
Twitter / TWTR Elon Musk USD 41.60 $54.20 30.3% $44.0 monetary 4/25/2022
Activision Blizzard / ATVI Microsoft / MSFT $75.04 $95.00 26.6% $68.7 monetary 1/18/2022
The Black Knight / BKI Intercontinental Exchange / ICE USD 67.22 US$81.76** 21.6% $13.1 cash + stock 5/4/2022
Semiconductor Tower / TSEM Intel / Intek USD 44.62 $53.00 18.8% 5.4 dollars monetary 2/15/2022
VMWare / VMW Broadcom / AVGO USD 112.57 $133.37* 18.5% $61.0 cash + stock 26/5/2022
Rogers DuPont / DD USD 243.91 $277.00 13.6% 5.2 dollars monetary 11/2/2021
Tegna / TGNA general standard US $21.89 $24.00 9.6% 5.4 dollars monetary 2/22/2022
Tinko / Tin Apollo / APO USD 18.65 $20.00 7.2% 7.1 dollars monetary 23/2/2022
First Horizon / FHN TD Bank Group / TD USD 23.48 $25.00 6.5% 13.4 USD monetary 28/2/2022
PNM / PNM Resources Avangrid / AGR $47.50 50.30 USD 5.9% 8.3 dollars monetary 10/21/2020
1 Live Healthcare / ONEM Amazon / AMZN $17.15 $18.00 5.0% $3.9 monetary 7/21/2022
iRobot / IRBT Amazon / AMZN $58.50 $61.00 4.3% 1.7 dollars monetary 8/5/2022

* Includes $71.25 in cash and 0.126 Broadcom share ** Includes $68 in cash and 0.144 share of Intercontinental Exchange

Source: Bloomberg, FactSet

But there are still plenty of goals to consider. Other stocks that are traded at deep discounts include the agreed deal prices

semiconductor tower

(TSEM), set to be acquired by Intel (INTC); Black Knight (BKI), set to be acquired by

Intercontinental Exchange

(ice);

TENICO

(TEN), to be purchased by funds linked to

Apollo

(APO); Rogers (ROG), is due to get it

DuPont

(DD); Tegna (TGNA), to be acquired by Standard General;

first horizon

(FHN), to be purchased by

bank 💰

(TD); And the

PNM . Resources

(PNM is due to be acquired by

Avangard

(AGR).

Three looks particularly interesting. The biggest deal awaiting regulatory approval up or down is

Microsoft
‘s

(MSFT) offered $68.7 billion to buy

Activision Blizzard

(ATVI), at $95 per share. That compares with $75.04 a share of Activision on Wednesday, at a discount of nearly 27%.

US regulators are looking into the deal and facing an antitrust investigation into Warren Buffett of Berkshire Hathaway in the UK, who is among investors betting that the video game maker’s shares will close the gap. The group increased its stake in Activision over the past year, holding about 68 million shares as of the end of the second quarter. BaronRecommended Activision purchase in July.

Other merger and arbitrage opportunities today could include stocks

VMware

(VMW), which agreed to acquire

from Broadcom

(AVGO) at about $61 billion. The deal includes both cash and a stock component: VMware shareholders can choose to receive $142.50 per share in cash, or 0.252 of Broadcom stock — valued at about $124.25 on Wednesday. The terms of the deal specify that about half will be paid in stock and the other half in cash, meaning shareholders may not get their preferred allotment, but instead receive a split payment.

A 50/50 split would value the deal at approximately $133.37 per VMware stock, or 19% above $112.50. This is also a bet on Broadcom stock – if the semiconductor company’s stock falls further, the expected deal value will also fall.

Another deal that may face a lengthy regulatory review is

JetBlue Airways

(JBLU) $3.8 billion bid for low-cost carrier network

Spirit Airlines

(save). It is valued at $33.50 per share in cash — or nearly 50% higher than the $22.40 per share of Spirit. The market seems skeptical that the deal will close. JetBlue shares have also halved since the bidding began.

Others are worth avoiding.

Amazon

AMZN announced a pair of acquisitions this summer: the robotic vacuum maker

iRobot

(IRBT) and

1 Live Healthcare

(ONEM), father of healthcare provider One Medical. Big Tech companies are generally under increased scrutiny from regulators and lawmakers, and the Federal Trade Commission has requested more information from Amazon regarding the One Medical deal. However, both targets are trading within 5% of their bid prices.

Of course, investors don’t have to do all of this themselves. A number of funds use merger and arbitrage strategies, including


Arbitration Fund

(ARBFX), which fell 1.3% in 2022, the


merger fund

(MERFX) which advanced 0.2%, and


BlackRock Events Driven Equity Fund

(BALPX), which decreased by 0.8%. There’s even an exchange-traded fund for that: The AltShares Merger Arbitrage ETF (ARB), which owns Alleghany, Twitter and Activision, returned 2.8% in 2022.

These may not be the brightest returns, but in a market like this, they don’t have to be.

write to Nicholas Jasinski at nicholas.jasinski@barrons.com

#Mergers #easier #Heres #Arb #stock #watch

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