Merger Arbitrage Blog

Completed BRCD Trade And Reorg For Rest of The Year

Hi guys it had been some time since my last update. I had been busy with some personal stuff and having a short vacation and since the year 2017 is coming soon, I thought it will be good to take a break, reorganise my thoughts and prepare for the new year. 




$BRCD: Since the last update, my biggest trade had been in the Broadcom/Brocade ($BRCD) merger. As several friends and members of the online trading community commented, this trade is a non-brainer and should pass the last regulatory scrutiny with little fuss. However investment, especially in arbritage world is always not so straight forward. Even though the merger was already in the last stretch, jittery and uncertainty about the prospects of CFIUS approval continued to haunt the stock until the last 3 weeks.

Then again, with fear and confusion came the opportunity for investors who had appraised the merger's risks approriately to profit from discounted share prices that are dumped onto the market on a daily basis. The discount got as wide as 10% within the last two months which was appropriate only for a medium risk merger that still had 1 year investment horizon but the market was gave us the opportunity to grab this kind of returns for a low risk, 2-3 months maximum time horizon investment. I will grab these opportunities all day long with all my firepower. 

In the end, I made abount 32% annualized returns on this trade with my biggest allocation of funds so far this year. This kind of classic trade is what I look for throughout the year and you only need 3 to 4 of these each year to make your annual target returns. Its worth noting that when I was initially invested in a medium sized $BRCD back in June, I disposed it by July after the initial prospects of early July approval disappeared. The spread back then was 2% or less which makes the idea of waiting till September (my initial estimate after CFIUS and FTC and China MOFCOM approvals did not come end of June.) less enticing. So do not be afraid of missing out on a little profit when many things that you expected did not turn out your way. Cut off a position when the prospects are dimming. However, be brave when everything is almost aligned for the merger and do not get too emotional to the stock price.

Many lessons to be learned here, especially on the changes in stance of CFIUS. Originally a merger that should be waved through, $BRCD had to go through 3 refiles and a big concession on Broadcom shifting its headquarters to U.S. to get it through. Investors do take note this will not bode well for other merger plays that involve CFIUS, even for friendly nations like U.K, E.U or Japan.



$TWX: I had to admit I broke my own rules for this trade. When AT&T ($T) and Time Warners ($TWX)'s merger was announced back and President Trump was against it during his campaign, I thought I would never get involved in this merger arbitrage trade as it was too risky. However, investors and traders are always going to influence by news and opinions and I am no different. The rhetorics was that the merger deal was going to get approval soon pending DOJ's decision in September and the press was especially optimisstic after Brazil CADE had given the go-ahead. I went on to accumulate a medium sized positions as well as some bull put spreads positions. Now, the merger was going to lawsuit and this is the worst outcome that I can think of. DOJ is just not going to compromise and there is an ongoing suspicion that the pressure is due to the president. 

I had reduced my initial positions by 50% and holding on to the rest pending the lawsuit results. This may take another 6 months. I do not expect a profit in this trade anymore. My take on the merit of the legal case is that DOJ is standing on some shaky grounds due to the lack of precedents and their own adovcacy of behavior remedy rather than structural remedy for vertical mergers. However, $T had slapped itself in the face by including some wordings that indicate they will make use of $TWX merger to impose higher prices and stiften competition. Ultimately I see $T winning the case so I am holding on to my reduced holdings.



$MON: Sold my previous positions at $121+ to fund my Brocade purchase. Re-entered position at $118 this month. Minor position so far but building into a medium sized position. Still feels good about the prospects of merger completion next year although both Brazil's CADE and EU had delayed their decisions to mid-March. DOJ still approve also. I had shifted my views of merger completion from Mar 2018 to Jun 2018 due to CFIUS, DOJ uncertainty. 

$PNK: Short term trade which I opened due to rumors about a merger with Penn National caused the stock price to spike in Oct. However I sold it once there is no concrete news on the merger. The stock prices kept rising though I do not know the reasons.Though I got a 57% annualized profit , this is only less for $100 for a few days of holding. 

$ALR: Bought at $48.7 and sold at $50.97 the next day. Short term opportunity.

Updated: November 28, 2017 — 6:36 am

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