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. When the deal is completed, the investor will exchange the stock of the company being acquired for the cash consideration.
The Salix–Valeant merger is a cash tender, meaning there are no shareholder votes required. Cash tender deals tend to have very short timelines because there is no need to get a proxy statement through the SEC and no waiting period to schedule a vote.
The timing makes the spread work
The key to this Salix–Valeant merger is the cash tender timing. The companies are guiding for the merger to close in the second half of 2015. Cash tender deals tend to have tiny spreads and large risk–rewards simply because there is very little carry in the deal. Note Salix (SLXP) has had some inventory issues recently, however, Valeant (VRX) has said it is comfortable with the problem.
One thing to note is that the merger agreement specifies that the deal needs to be reviewed according to the provisions of the Hart–Scott–Rodino Antitrust Improvements Act. Tender offers usually get an accelerated review, and there appears to be no overlap, so the waiting period could terminate in 15 days.
There is a marketing period after the deal closes of up to 20 days for the bankers to syndicate out the debt. These are not typically used, however, the buyer can use them if necessary.
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 healthcare sector should look at the Health Care Select Sector SPDR Fund (XLV).