Every quarter, I compile the top 10 stocks held in funds that specialize in merger stocks and share them with our Search Alpha community.
- I only count one share if it is is at least 1% of the fund’s portfolio.
- I only include stocks that are still actively traded.
- I only select funds where most positions are merger related.
Since last quarter’s article, the two major merger stocks have finally seen 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 these two stocks fetched much more than originally expected, but in the end the holders made money although perhaps not a huge IRR.
This quarter’s top stocks are Seagen (SGEN). 23 of my 33 funds own the stock. Eight months ago Pfizer (PFE) they agreed PURCHASE Seagen, a cancer-focused biotech for $229 per share in cash. The deal is currently in a second filing with the Federal Trade Commission. Two weeks ago, Pfizer CEO Albert Bourla said 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 potential combination a year and a half ago, the deal has not yet been closed. What remains is China’s approval. The merger is set to close 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 it will happen by the deadline.
There is an interesting wrinkle. The merger called for VMware shareholders to elect to receive $142.50 in cash OR 0.2520 shares of Broadcom. Because Broadcom’s stock had risen since the merger announcement, the stock was clearly the preferred choice, resulting in the non-voters taking the cash consideration. So anyone buying now would be entitled to $142.50 in cash, well below where the stock was trading before the election deadline. So why is VMW trading around $150 per share? The possibilities?
- The market believes that there is a possibility that the merger will not be closed within the deadline, will be extended and the election window will be reopened.
- It is trading at standalone value (although the standalone value is likely much lower in my opinion, maybe $40 lower).
Top 10 Arb merger stocks held by funds
|1) Sawing||It is held by 23 funds||28% IRR|
|2) VMware||It is held by 20 funds||Special situation|
|3) Capri (CPRI)||It is held by 17 funds||54% IRR|
|4) Splunk (SPLK)||It is held by 16 funds||11% IRR|
|5) Abcam (ABCM)||It is held by 15 funds||6% IRR|
|6) Albertsons Companies (ACI)||It is held by 13 funds||99% IRR|
|7) Amedisys (AMED)||It is held by 10 funds||14% IRR|
|8) PNM resources (PNM)||It is held by 9 funds||95% IRR|
|8) Sovos brands (BUF)||It is held by 9 funds||14% IRR|
|10) Greenhill (GL)||It is held by 8 funds||28% IRR|
When a fund makes an M&A stock its top holding, it signals strong belief that the deal will eventually close. Two funds had the three stocks in the chart below as their top picks at the end of the third quarter.
Top positions among 33 funds
|seen||Lead position in 2 funds|
|Splunk||Lead position in 2 funds|
|VMware||Lead position in 2 funds|
Some arb funds outperform positions in which they have strong conviction. As of September 30, there were four positions of 12% or more in a single stock.
|Chindata Group Holdings Limited (CD)||31% of a Fund|
|seen||20% of a fund|
|Garden therapeutics (ORTX)||19% of a Fund|
|VMware||12% of a Fund|
While there is no substitute for doing one’s own work and developing one’s own unique trading/investing style, it is quite valuable to look at what some of the top hedge funds are doing with their money. These funds have more resources, staff and contacts than an individual investor can have.
While there is no guarantee that the above deals will close, the fact is that approximately 94% of all mergers close, and when M&A professionals part with their money in an arb position, the odds even improve.
Editor’s Note: This article discusses one or more securities that are not traded on a major U.S. stock exchange. Please be aware of the risks associated with these stocks.