Merger Arbitrage is a popular investment strategy that strives to take advantage of uncertainties between when a merger or acquisition is announced and when it's completed. When executed properly, it can guarantee annualized gains of between 3% and 5% or more. With Lina Khan at the helm of the Federal Trade Commission (FTC), behemoths are struggling to close M&A deals presenting unique arbitrage opportunities. The agency moving to block Amgen's $27.8 billion takeover of Horizon affirms how the agency is going against the most powerful businesses resulting in the widening of arbitrage spreads that hedge funds and investors are taking advantage of.
The merger arbitrage strategy entails buying and selling stocks of two merging companies to create risk-free profit. It mostly takes two forms. Pure Arbitrage entails buying the target company with the expectation that its share price will increase when the acquisition news hits the market.
If an investor already owns shares prior to the announcement, they can benefit from the share price increasing on the acquirer tabling a premium price for the shares. The difference between the price the acquirer is buying the target company and the prevailing market price is the arbitrage spread. The wider the spread, the greater the prospects of earning with the merger arbitrage strategy.
On the other hand, speculative arbitrage entails buying the target company in an M&A deal in anticipation that its share price will go up once the deal closes. If the deal falls through for several reasons, the share price often drops, resulting in losses for people who bought the stocks after the announcement.
The merger arbitrage strategy is not risk-free and comes with its fair share of risks. The uncertainty of whether the merger will be completed is one of the biggest risks exacerbated with MS Khan at the FTC in recent years.
For the longest time, MS Khan had insisted that the FTC was simply backing and not biting as behemoths turned to mergers and acquisitions to grow their monopolistic powers. Two years into her tenure at the FTC, Wall Street is increasingly learning how far she is willing to take the fight against America's powerful businesses.
Merger arbitrage investors had their worst month of the year in May as Khan ramped up the FTC push to block deals over antitrust concerns. The agency has already sought to block Amgen's takeover of Horizon Therapeutics.
It has also sought to block Microsoft's $69 billion acquisition of Activision Blizzard, triggering another merger arbitrage opportunity. The agency insists that the Xbox maker acquiring Activision will gain access to one of the most important gaming franchises in Call of Duty and also affect competition in the gaming sector.
Faced with the mounting regulatory pressure targeting behemoths like Google, Amazon and Meta looking to complete M&A deals, hedge funds are having to switch up their playbook. While some have resorted to unwinding struggling positions, others have resorted to trading swings in spreads as deal prospects fluctuate.
Merger arbitrage opportunities increase whenever there is market turbulence. During such periods share prices decline, resulting in wider arbitrage spreads. Some events that cause arbitrage spreads to widen include regulatory uncertainties that trigger share price losses and interest rate hikes that affect sentiments in the equity markets.
The widening of the arbitrage spreads presents some of the best opportunities for high-risk tolerant investors confident that a given M&A deal will come to fruition. Hedge funds take advantage of such interesting opportunities to enter and play out the overblown spreads through merger arbitrage strategy.
Considering the regulatory uncertainties and the widening arbitrage spreads due to market turbulence, we present some of the best merger arbitrage opportunities for 2023.
The article considers the stocks based on the merger or acquisition value and the difficulties involved in completing them. The article also considers the arbitrage opportunities based on the offered takeover prices. The stocks are ranked according to the acquisition bid size.
Merger Arbitrage Opportunities in 2023
15. Amazon.com, Inc. (NASDAQ:AMZN)’s $1.7B Acquisition of iRobot
Consideration: $61 a share
Spread: 29%
Main Risk: Regulatory Scrutiny
Amazon.com, Inc. (NASDAQ:AMZN)'s foray into the smart home space has seen it table a $1.7 billion bid to acquire iRobot, a company best known for the Roomba-branded autonomous branded vacuum cleaners. However, the deal has attracted regulatory scrutiny, with the latest being from the
The U.K. E.U. regulators are also looking to scrutinize the deal on privacy grounds concerning how Amazon might combine data from the two companies to gain a competitive advantage.
Amazon.com, Inc. (NASDAQ:AMZN)'s $1.7 billion deal translates to $61 a share for iRobot. Given that iRobot stock is trading for about $47 a share, the arbitrage spread stands at $14 or 29%.
14. Thoma Bravo $2.3B Acquisition of ForgeRock
Consideration: $23.25 a share
Spread: 17.6%
Main Risk: Regulatory Approval
Software investment firm Thoma Bravo has agreed to acquire global digital identity leader ForgeRock. The $2.3 billion deal values FORG at about $23.25 a share. ForgeRock shareholders have already approved the transaction and are awaiting regulatory approvals. The closing time has been extended, awaiting regulatory approval.
With ForgeRock trading for $19.77 a share compared to the $23.25 acquisition bid, the arbitrage spread stands at $3.48 or 17.6%.
13. China Merchant $3.4B Acquisition of Chindata Group Holdings Limited (NASDAQ:CD)
Consideration: $9.2 a shareSpread: 11.2%Main Risk: N/A An arm of Chinese state-owned conglomerate China Merchants Group has tabled a $3.4 billion takeover bid for Chindata Group Holdings Limited (NASDAQ:CD). The takeover bid translates to a non-binding offer of $9.2 a share of Chindata stock. The acquisition bid comes amid growing demand for data centers and cloud services in China amid the widespread adoption of AI technologies. The $9.2 a share offer translates to an 11.2% arbitrage spread as Chindata is currently trading at about $8.23 a share
12. Maxlinear Inc (NASDAQ:MXL)'s $3.8B Acquisition of Silicon Motion Corp
Consideration: $93.54 a share
Spread: 46%
Main Risk: China-US Tensions
Maxlinear Inc (NASDAQ:MXL) has inched a step closer to completing the acquisition of Silicon Motion Corp, a company that develops NAND flash controllers. The provider of radio frequency has tabled a $3.8 billion takeover bid that values Silicon Motion at $93.54 a share.
Regulatory approval from China has been the sticking point in the deal, given that Maxlinear Inc (NASDAQ:MXL) is based in the U.S. while Silicon Motion has its base in Taiwan, with China its biggest market.
With SIMO shares going for about $63.65 a share, the arbitrage spread on the stock stands at $29.89 or 46%.
11. JetBlue Airways Corporation (NASDAQ:JBLU)’s $3.8B Acquisition of Spirit Airlines
Consideration: $31 a share
Spread: 61%
Main Risk: N/A
JetBlue Airways Corporation (NASDAQ:JBLU) bid to acquire Spirit Airline for $3.8 billion hangs in the balance. A merger of the two is expected to result in the fifth-largest airline in the country. However, there are concerns that the merger will eliminate the unique competition Spirit provides in the market by offering ultra-low-cost airline seats. The Justice Department has moved to block the deal, arguing it will negatively impact consumers.
Given that JetBlue has proposed a $31 a-share takeover, the arbitrage spread stands at $11.79 or 61% of Spirit Airlines' current share price of $19.21 a share.
10. L3Harris Technologies Inc (NYSE:LHX)'s $4.7B Acquisition of Aerojet Rocketdyne
Consideration: $58 a share
Spread: 3.5%
Main Risk: Regulatory Approval
L3Harris Technologies Inc (NYSE:LHX), one of the largest defence contractors, reached an agreement to acquire Aerojet Rocketdyne in a $4.7 billion deal. The $ 58-a-share deal reached last year raises concerns about whether it will strangle competition in the defence sector. A merger arbitrage opportunity remains in play amid regulatory pressures and uncertainty.
With Aerojet Rocketdyne trading for about $56.01 a share, the arbitrage spread is about $2, going by L3Harries $58 a share acquisition bid. Consequently, there is a prospect of gaining 3.5% on acquiring the stock at current levels.
9. Exxon Mobil Corporation (NYSE:XOM) $4.9 Acquisition of Denbury Inc. (NYSE:DEN)
Consideration: $89.45Spread: 3.24%Main Risk: Regulatory Scrutiny Exxon Mobil has move to enhance its network of carbon dioxide pipeline in the US with $4.9 billion bid to acquire Texas based Denburry for $89.45 a share. With the acquisition the company is to gain access to over 2,092 kilometers of pipelines dedicated to transporting CO2. If approved the deal will be the company’s largest acquisition in six years. However, Exxon Mobil Corporation (NYSE:XOM) will have to navigate regulatory scrutiny to close the deal. The acquisition presents a merger arbitrage opportunity. The arbitrage spread currently stands at 3.24%.
8. Intel Corporation (NASDAQ:INTC)'s $5.4B Acquisition of Tower Semiconductor
Consideration: $53 a share
Spread: 41%
Main Risk: Regulatory Approvals
Intel Corporation (NASDAQ:INTC) is looking to strengthen its prospects in the foundry market with the acquisition of Israel-based Tower Semiconductor. Intel has already tabled a $5.4 billion bid that values Tower Semiconductor at $53 a share. The deal has been delayed for over 12 months as the two seek regulatory approvals and customary closing conditions.
Given that Tower Semiconductor is trading for $37.42 a share, the arbitrage spread stands at $15.58 or 41%. Acquiring the stock at current levels presents an opportunity to gain 41% upon the deal closing.
7. Standard General's $8.6B Acquisition of Tegna
Consideration: $24 a share
Spread: 46%
Main Risk: Industry opposition
Tegna is the subject of an acquisition drive spearheaded by a consortium of buyers that includes Standard General, Apollo and Cox Media. The deal has already hit market turbulence in the wake of various industry players and unions raising their concerns that a merger of the two will control too much of the market share. There are also concerns that people might lose jobs in the two companies, with concerns of reduced local news coverage.
Amid the concerns, the arbitrage spread of the proposed merger has widened. With Tegna trading for about $16.33 a share and the buyers proposing a $24 a share takeover, the arbitrage spread stands at $7.67 or a spread of about 46%.
6. Adobe Inc (NASDAQ:ADBE)’s $20B Acquisition of Figma
Consideration: N/A
Spread: N/A
Main Risk: Regulatory Pressure
Adobe Inc (NASDAQ:ADBE) has moved to strengthen its bid to enhance digital experience by tabling a $20 billion takeover bid of Figma, a leading web-first collaborative design platform. The two hope to come together to reimagine the future of creativity and productivity by accelerating creativity on the web while advancing product design.
Nevertheless, the $20 billion merger faces a lengthy antitrust investigation in the European Union. European antitrust officials plan to start a formal investigation on concerns that a merger of the two will lead to less innovation and higher prices.
If approved, the $20 billion deal could strengthen Adobe's edge in the digital design market, given that Figma will have an addressable market of $16.5 billion by 2025 and add approximately $200 million in net new ARR this year.
The prospect of Adobe Inc (NASDAQ:ADBE)'s share price increasing due to the transaction presents a unique merger arbitrage opportunity.
