Merger spread analysis
To perform merger arbitrage, the investor will generally buy the stock of the company being acquired and wait for the deal to close. Then, the investor will exchange the stock of the company being acquired for the cash consideration.
The Baker Hughes and Halliburton merger is a cash-stock deal. This means that there will be a shareholder vote and that Halliburton will take Baker Hughes out for a combination of cash and stock. Arbitrageurs would buy Baker Hughes (BHI) stock, short 1.12 shares of Halliburton (HAL) per BHI share, and wait for the merger to close. Then, arbitrageurs will exchange their BHI shares for 1.12 HAL + $19.
When oil falls, deals increase
When oil prices fall, valuations get hit, and that creates opportunities for the strong to pick up rivals. After oil collapsed in the late 1990s, we saw some massive deals in the petroleum industry. Exxon (XOM) merged with Mobil, Conoco (COP) combined with Phillips Petroleum, and British Petroleum (BP) acquired Amoco.
With all of these major oil deals come the risk of antitrust scrutiny. The Baker Hughes and Halliburton merger is no different.
An elongated timeline
Deals with antitrust risk often go through a long process with antitrust regulators. Baker Hughes and Halliburton received a request for more information from the US Department of Justice (or DOJ) on February 10. The companies are guiding for a closing date in the second half of 2015, but negotiations with the DOJ will drive that timeline.
Other merger arbitrage resources
Other important merger spreads include the deal between Hospira (HSP) and Pfizer (PFE). For a primer on risk arbitrage investing, read Merger arbitrage must-knows: A key guide for investors.
Investors who are interested in trading in the energy sector should look at the Energy Select SPDR ETF (XLE).