Maksim Labkouski
Maksim Labkouski
It has been interesting times in the M&A world. There have been plenty of deals but as arbitrageurs, with risk free returns being greater than 5%, one must examine the risk-reward in each deal more carefully than ever.
On the other hand, there are some wide spreads due to the recent heavy regulatory scrutiny both here in the US and abroad.
Each quarter, I compile the top 10 stocks held in the funds that specialize in merger stocks and share it with our Seeking Alpha community.
My rules:
For the third consecutive quarter, Horizon Therapeutics (HZNP) is the top stock. 28 of my 33 funds own it as of June 30. Amgen (AMGN) is in the process of acquiring Horizon for $116.50 in cash.
Despite the fact that the Federal Trade Commission has filed suit to block the $28B purchase, the arb community continues to be bullish on the deal. The trial is set for September 11 but just this week there has been speculation about a potential settlement with the FTC. According to Amgen, they are working on integration plans with Horizon and expect the deal to close by the end of the year.
Meanwhile, for the 5th straight quarter Activision Blizzard (ATVI) is in the top two. It is in 21 of the 33 funds. Microsoft (MSFT) is trying to buy Activision for $68.7 billion which is $95 per share in cash. This deal had gone through all sorts of issues. Still, the CMA has yet to have signed off. Much like Horizon, arbs are uber confident that this merger will finally close. This week, Microsoft and Activision revised the agreement, with Microsoft agreeing to not acquire the cloud streaming rights to all current and future Activision games released in the next 15 years. These rights will instead be divested to the French group Ubisoft Entertainment (OTCPK:UBSFY).
The U.K.'s antitrust regulator has opened a Phase 1 probe into the newly restructured deal, and has set an October 18 deadline.
| 1) Horizon Therapeutics | Held by 28 funds | 34% IRR |
| 2) Activision Blizzard | Held by 21 funds | 23% IRR |
| 3) Seagen (SGEN) | Held by 21 funds | 38% IRR |
| 4) VMware (VMW) | Held by 15 funds | 61% IRR |
| 5) National Instruments Corporation (NATI) | Held by 15 funds | 6% IRR |
| 6) Syneos Health (SYNH) | Held by 13 funds | 4% IRR |
| 7) Focus Financial Partners (FOCS) | Held by 14 funds | 14% IRR |
| 8) Albertsons Companies (ACI) | Held by 12 funds | 53% IRR |
| 9) CIRCOR International (CIR) | Held by 8 funds | 3% IRR |
| 10) NeoGames (NGMS) | Held by 8 funds | 12% IRR |
When a fund makes an M&A stock its top holding, it signals strong conviction that the deal will ultimately close. Nine funds had Horizon as its top pick as of the end of 2Q.
| Horizon Therapeutics | Top Position in 9 Funds |
| Activision Blizzard | Top Position in 4 Funds |
| VMware | Top Position in 2 Funds |
Some arb funds oversize the positions that they have great conviction in. As of June 30, there were four positions of 15% or more in a single stock.
| Horizon Therapeutics | 63% of a Fund |
| Activision Blizzard | 29% of a fund |
| National Instruments Corporation | 15% of a Fund |
| PNM Resources | 15% of a Fund |
These days there are deals with large spreads with regulatory decisions hanging in the balance. And a host of others with spreads barely higher than the risk free return of money. But there are always opportunities in M&A and the above data is a good place to start research.
Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.