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:
- I only count a stock if it is at least 1% of the fund’s portfolio.
- I only include stocks that are still actively trading.
- I only choose funds where the majority of positions are merger-related.
Since last quarter’s article the top two merger stocks finally saw their deals close. Activision Blizzard (ATVI) and Horizon Therapeutics (HZNP) were the largest M&A positions of the funds I track for more than a year. Each of those two stocks took a lot longer than initially expected but in the end those who held made money though perhaps not a great IRR.
Top Two
This quarter’s top stock is Seagen (SGEN). 23 of my 33 funds own the stock. Eight months ago Pfizer (PFE) agreed to purchase Seagen, a cancer-focused biotech for $229 per share in cash. The deal is currently on a second request with the Federal Trade Commission. Two weeks ago, Pfizer CEO Albert Bourla said that he expects the acquisition to close before the end of the year or early next year.
VMware (VMW) is second on the list. Broadcom (AVGO) and VMware announced the potential combination a year and a half ago yet still the deal hasn’t closed. What is left is China approval. The merger is set to expire on November 26, less than a week from now. Broadcom had said it expected to close the merger by the end of October but they still remain confident of that happening by the deadline.
An interesting wrinkle exists. The merger called for VMware shareholders to elect to receive $142.50 in cash OR 0.2520 share of Broadcom. Because Broadcom’s stock had risen since the merger announcement, stock was clearly the preferred election resulting in non-electors getting the cash consideration. So anyone buying now would be entitled to $142.50 in cash, far below where the stock was trading before the election deadline. So why is VMW trading around $150 per share? Possibilities?
- The market believes there is a chance the merger doesn’t close by the deadline, gets extended and the election window will be reopened.
- It is trading at standalone value (though standalone value is likely much lower in my opinion, perhaps $40 lower).
Top 10 Merger Arb Stocks Held By Funds
1) Seagen | Held by 23 funds | 28% IRR |
2) VMware | Held by 20 funds | Special Situation |
3) Capri (CPRI) | Held by 17 funds | 54% IRR |
4) Splunk (SPLK) | Held by 16 funds | 11% IRR |
5) Abcam (ABCM) | Held by 15 funds | 6% IRR |
6) Albertsons Companies (ACI) | Held by 13 funds | 99% IRR |
7) Amedisys (AMED) | Held by 10 funds | 14% IRR |
8) PNM Resources (PNM) | Held by 9 funds | 95% IRR |
8) Sovos Brands (SOVO) | Held by 9 funds | 14% IRR |
10) Greenhill (GHL) | Held by 8 funds | 28% IRR |
When a fund makes an M&A stock its top holding, it signals strong conviction that the deal will ultimately close. Two funds had the three stocks in the chart below as its top pick as of the end of 3Q.
Top Positions Among The 33 Funds
Seagen | Top Position in 2 Funds |
Splunk | Top Position in 2 Funds |
VMware | Top Position in 2 Funds |
Some arb funds oversize the positions that they have great conviction in. As of September 30, there were four positions of 12% or more in a single stock.
Oversized Holdings
Chindata Group Holdings Limited (CD) | 31% of a Fund |
Seagen | 20% of a fund |
Orchard Therapeutics (ORTX) | 19% of a Fund |
VMware | 12% of a Fund |
Conclusion
While there is no substitute for doing one’s own work and developing one’s unique trading/investing style, looking at what some of the top arb hedge funds are doing with their money is quite valuable. These funds have more resources, staff, and contacts that an individual investor can possibly have.
While there is no guarantee that the above deals will close, the fact is approximately 94% of all mergers do close and when the M&A professionals allocate their money to an arb position the odds even get better.
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.
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