Mergers Might Be Getting Easier. Here Are the ‘Arb’ Stocks to Watch.
UnitedHealth Group ’s $13 billion acquisition of health-tech firm Change Healthcare is a go, after a federal judge ruled against the Justice Department’s antitrust challenge to the deal—and there are other merger deals that could get the green light in the months ahead.
Change stock (ticker: CHNG) jumped some 7% this past Tuesday and Wednesday, to $27.21. That’s a hair below the acquisition price of $27.75 per share in cash. The stock had traded largely between $20 and $24 since the deal was struck, reflecting investors’ collective uncertainty about whether or not it would close. UnitedHealth (UNH) struck a deal with Change way back in January 2021 and the Biden administration sued to block the deal in February 2022.
Those who bought Change stock betting on the deal eventually closing can soon pocket the difference. It’s an example of a strategy called merger arbitrage, which provides a yield opportunity that isn’t correlated with the direction of the stock market or interest rates.
Most M&A targets see their share price quickly converge with the buyer’s offer. For example, shares of insurer Alleghany (Y) were recently trading at around $842.85 per share, versus the all-cash acquisition price of $848.02 agreed with Berkshire Hathaway (BRK.A, BRK.B). That’s a discount of less than 1% to the transaction value.
But when there’s uncertainty surrounding a deal—possibly due to an antitrust challenge, concerns about financing, or major shareholder opposition—the target’s shares may trade at a meaningful discount to the agreed-upon price. It leaves an opportunity for investors willing to take the risk that the deal will close.
Not all those risks are worth taking. The most high-profile merger arbitrage opportunity these days is in Twitter (TWTR), which is fighting in court to compel Elon Musk to purchase the social-media company for $54.20 a share, or about $44 billion. Twitter stock was trading at $41.60 on Wednesday, 30% below the deal price.
That’s a tough one to handicap. Musk isn’t your average buyer, and the risk to the stock is substantial should the deal fall through. Since the Tesla (TSLA) co-founder publicly disclosed a 9.2% stake in Twitter on April 4, the shares are up 6%—versus a 20% loss for the Nasdaq Composite and declines of 35% and 70% for social media rivals Meta Platforms (META) and Snap (SNAP). It’s fair to say that Twitter stock would be a lot lower today if not for Musk’s potential offer.
But there are still plenty of targets to look at. Other stocks trading at meaningful discounts to their agreed-upon deal prices include Tower Semiconductor (TSEM), due to be acquired by Intel (INTC); Black Knight (BKI), due to be acquired by Intercontinental Exchange (ICE); Tenneco (TEN), due to be acquired by funds associated with Apollo (APO); Rogers (ROG), due to be acquired by DuPont (DD); Tegna (TGNA), due to be acquired by Standard General; First Horizon (FHN), due to be acquired by TD Bank (TD); and PNM Resources (PNM, due to be acquired by Avangrid (AGR).
Three look particularly interesting. The largest deal waiting for a thumbs up or down from regulators is Microsoft ’s (MSFT) $68.7 billion bid for Activision Blizzard (ATVI), valued at $95 a share. That compares with Activision stock’s $75.04 on Wednesday, a discount of almost 27%.
U.S. regulators are looking into the deal and it faces an antitrust probe in the U.K. Berkshire Hathaway’s Warren Buffett is among the investors betting that the videogame maker’s shares will close the gap. The conglomerate has increased its stake in Activision over the past year, to own some 68 million shares as of the end of the second quarter. Barron’srecommended buying Activision in July.
Other merger-arbitrage opportunities today could include shares of VMware (VMW), which has agreed to be acquired by Broadcom (AVGO) for about $61 billion. The deal includes both a cash and a stock component: VMware shareholders can elect to receive $142.50 per share in cash, or 0.252 of a Broadcom share—worth about $124.25 on Wednesday. The terms of the transaction specify that about half will be paid in stock and half in cash, meaning that shareholders may not get their preferred allocation, but instead receive a prorated payment.
A 50/50 split would value the deal at about $133.37 per VMware share, or 19% above its recent $112.50. That’s also a bet on Broadcom stock however—should the semiconductor firm’s stock fall more, the expected deal value will decline too.