In the past two months, two large acquisition deals have been announced and accepted by the target companies. Both were transacted at healthy premiums to the pre-deal share price of the target. Mr. Market has not been convinced at all of the successful outcome of the deals. He may indeed turn out to be correct. Nonetheless, both of these deals offer highly intriguing arbitrage opportunities at the right time. Investors should keep close watch on them.
Several weeks ago, Germany's Bayer struck a deal to acquire Monsanto (MON) for $128 a share in cash. At the time, Monsanto shares were trading for $108. Today, shares trade for around $102, or a 20% discount to the deal price. Bayer is confident in the deal succeeding and putting its money where its mouth is: Monsanto will receive a $2 billion breakup fee if the deal fails due to regulatory hurdles.
To be sure, the deal faces immense regulatory pressure and the market is discounting that in the price today. Also, it's likely to take around a year or so before the deal closes. In addition to regulatory risk, Bayer has a huge task in raising the necessary funds. So this is certainly not a done deal.
Still, investors should keep a close eye. The stock market is an anticipatory creature. Mr. Market won't wait until all the t's are crossed before sending shares higher. And a good opportunity remains for a healthy annualized return of at least 20% or more.
In very similar fashion, AT&T (T) has agreed to acquire Time Warner (TWX) for $107.50 per share. After jumping 3% on the news, Time Warner shares now sit at $87, virtually unchanged from where they were before the deal. The market at the moment sees little chance of a deal happening. It faces immense regulatory hurdles and will likely take some time to work its way through. For now, it's not a quality merger arb play, but it could very well be. (AT&T is part of TheStreet's Dividend Stock Advisor portfolio.)
Markets typically don't serve such wide spreads. For now, I would side with Mr. Market, but that could change very quickly and I suspect the opportunities will present themselves in the near future.