Merger Arbitrage. Kirchner Thomas
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Название: Merger Arbitrage
Автор: Kirchner Thomas
Издательство: Автор
Жанр: Зарубежная образовательная литература
isbn: 9781118736661
isbn:
One complication in the merger is that even though CGA Mining is an Australian company, it is dually listed in Canada and Australia. An arbitrageur must decide which of the two shares to purchase. A brief glance at the trading volume of the shares on the two exchanges shows that the vast majority of the trading volume occurs in the Canadian market. Another advantage of investing in the Canadian shares is that arbitrageurs do not have to deal with the unfavorable time zone during which the Australian market is open for trading. Executing both sides of the arbitrage simultaneously can be difficult for companies whose shares are listed on different continents and where opening hours overlap only briefly, if at all.
The stock prices of B2Gold and CGA are shown in Figure 2.4. It can be seen that CGA jumped on September 19, the day of the announcement, from a close of C$2.65 the prior day to an open of C$2.84, rose as high as C$2.95 during the day and closed at C$2.71. B2Gold had closed at C$4.30 before the announcement and fell to a closing price of C$3.79. Articles in the press often attribute such a drop of an acquirer's stock price to skepticism about the merger in the investor community. However, it will be seen that the drop is often the byproduct of arbitrage activity.
Figure 2.4 Stock Prices of B2Gold and CGA
For simplicity, it will be assumed that an arbitrageur enters the position on September 19 at the closing price. The arbitrageur will execute two transactions:
1. Pay C$2.86 per share to buy 1,000 shares of CGA. This is the volume-weighted average price (VWAP) for the day, a realistic level at which investors could have bought CGA.
2. Sell short 740 shares of B2Gold at C$3.95 per share, which is the VWAP for this stock for September 19.
It helps to examine the cash flows and stock holdings after these two trades. They can be found in Table 2.1. There is an expense of C$2,860 to acquire the shares of CGA, and proceeds from the short sale amount to C$2,923.
Table 2.1 Cash Flows in CGA/B2Gold Merger
It can be seen that this transaction leaves the arbitrageur with a net cash inflow of C$63. At the closing of the merger, the 1,000 shares of CGA will be converted into 740 shares of B2Gold. The arbitrageur is then long 740 shares and at the same time short 740. The long position can then be used to deliver shares to the counterparty from which the short position was borrowed. Once the delivery has been completed the arbitrageur no longer has a position in stock, long, or short, but is left with a profit of C$63.
The example of 1,000 shares is useful for illustrative purposes. Rather than looking at the purchase of 1,000 shares, transactions should be calculated on a per-share basis. Each share of CGA is converted into 0.74 shares of B2Gold. For each share of CGA purchased, the arbitrageur must sell short 0.74 shares of B2Gold. By multiplying the exchange ratio with the stock price of B2Gold, it can be seen that per share of CGA an arbitrageur receives C$2.923 (0.74 × 3.95) from the short sale of B2Gold. The spread is hence C$0.063 per share of CGA.
The return calculation is simplified here in that no dividends need to be taken into account. Neither of the two companies has ever paid any dividends, and there was no reason to believe that this would change prior to the closing of the merger.
2.5
where
The gross return on this arbitrage is 2.2 percent.
Calculation of the annualized return works as in the example of a cash merger. Only the calculation of compound returns is shown here; simple interest can be calculated analogously. Unlike in the prior examples, the arbitrageur cannot find a direct reference to the closing date in the press release. “The merger will be implemented by way of a Scheme of Arrangement under the Australian Corporations Act 2001” gives a valuable hint. As I will explain later, a scheme of arrangement follows a well-defined timetable. A five-month time frame is a reasonable estimate. If we assume a closing date of February 28, 2013, then there are 162 days from September 19, the day the position was entered.
Compound interest
2.6
The expected annualized return at the time of entering the position is 5.0 percent. The actual closing of this merger occurred on January 18, 2013, so the actual return on this arbitrage was an annualized 6.9 percent over 121 days.
One of the advantages of stock-for-stock mergers is the simultaneous holding of a long and a short position. Because of the upcoming merger, the two stocks are highly correlated, so that an increase in CGA's stock price is accompanied by an offsetting increase in B2Gold's. If the two stocks were no longer to move in parallel, the spread would change, and the annualized return available to arbitrageurs would either compress or expand.
However, as the fluctuations in the two stocks mostly cancel out due to the short position in B2Gold, the net result for the arbitrageur is a much smoother ride than what an index investor experiences. The evolution of the spread of the CGA/B2Gold merger is shown in Figure 2.5. In the case of a cash transaction, the spread depends on only one variable. In a stock-for-stock merger, it depends on two stock prices. The spread does trend toward zero over time. The spread is not very smooth on an absolute basis. But compared to the gyrations in the index over the same time, the volatility is much lower.
Figure 2.5 Evolution of the CGA/B2Gold Spread
It is clear that short sales from arbitrage activity can lead to significant selling pressure on the stock of a buyer after the announcement of a stock-for-stock merger. Often analysts and journalists attribute the drop of a buyer's stock after a merger announcement to fundamental reasons, such as the prospect for the merged entity. One account of the trading activity following the announcement of the merger of Trane Inc. with Ingersoll-Rand is shown in Exhibit 2.3. Ingersoll-Rand fell over 11 percent following the announcement of the merger. The fundamental reasoning behind this merger appeared solid. Some reports suggested that the combination of the two firms created the number-two air-conditioning company in the United States. The long-term prospects of Ingersoll-Rand clearly were not bad and would not have justified an 11 percent drop. It can be explained only by arbitrage activity. Experienced investment bankers warn company management during merger negotiations of the risk to their stock price and suggest structures with a cash component to a stock-for-stock merger in order to reduce short selling.
TRENTON, N.J. (AP) – In a deal worth a cool $10 billion, Ingersoll-Rand Co. will acquire Trane Inc. and create one of the world's largest makers of commercial and residential СКАЧАТЬ