One of the strategies on Wall Street that sounds mysterious to investors but really is, in many cases, a reasonably safe way to secure return, is called merger arbitrage. While it sounds very exotic, at the core it is an educated guess that a deal that has been announced and is in the process of being completed indeed gets done.
Typically hedge funds and other investors that deal in this strategy will buy the stock of a company being bought, and then simultaneously sell short the stock of the acquiring company to create a riskless profit. Because of this slight uncertainty, the target company’s stock will typically sell at a discount to the price that the combined company will have when the merger is closed. This discrepancy is the arbitrageur’s profit.
For anyone who doesn’t want to deal with the selling short part, the idea would be just to buy the stock of the company being acquired because of the discount to the acquisition price and the good probability that the deal does indeed get done.
The Jefferies analysts feel that four of the current deals look solid, and owning the company being acquired may be a good move for investors who have a higher risk tolerance.
This company was spun off from Baxter International in 2015 and is one of the Jefferies high-conviction long trades. Baxalta Inc. (NYSE: BXLT) is a global biopharmaceutical leader developing, manufacturing and commercializing therapies for orphan diseases and underserved conditions in hematology, immunology and oncology.
Baxalta’s broad and diverse pipeline includes biologics with novel mechanisms and advanced technology platforms such as gene therapy. Baxalta’s heritage in biopharmaceuticals spans decades. Its therapies are available in more than 100 countries, and it has advanced biological manufacturing operations across 12 facilities, including state-of-the-art recombinant production and plasma fractionation.
Shire finally concluded a six-month pursuit of the company in January when the two companies agreed to a $32 billion buyout, which some say will create the world’s biggest rare-disease drugmaker. Shire agreed to pay $18 in cash plus 0.1482 of its American depositary shares for each Baxalta share, making this one of the few ever cash-and-stock deals involving a recent tax-free spinoff. The deal terms imply a valuation of approximately $47.50 per share for Baxalta shareholders. There are tax inversion issues that may cloud the sale and should be considered.
Baxalta shareholders receive a small 0.72% dividend. The Thomson/First Call consensus price target is $46. The shares closed Wednesday at $38.98.
This company is flat out cheap, trading a five times enterprise value to EBITDA, and is being taken private in a deal with Dell. EMC Corp. (NYSE: EMC) is technology’s large-scale storage leader, but new avenues of flash and other storage opportunities are grinding away at the tech giant’s business. The good news for the company is that storage demands are accelerating.
The company’s majority ownership of VMware gives it a virtualization infrastructure solutions product, which includes a suite of products designed to deliver a software-defined data center, run on industry-standard desktop computers and servers. Wall Street was very positive on the platform-as-a-service opportunity and believes EMC’s Pivotal could grow to be a significant business.
Dell is buying the storage giant for a stunning $67 billion, which will make it the largest deal in tech history when completed. The computer maker plans to pay $24.05 a share in cash plus tracking stock VMware, valued at about $9 for each EMC share. This is another one of the Jefferies high-conviction long ideas.
EMC shareholders receive a 1.8% dividend. The consensus price target is $28.52. Shares closed Wednesday at $25.43.