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Could the Pharmacyclics–AbbVie Merger Get Competitive?

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Could this deal get broken up?

For merger arbitrage professionals, competitive deals can make your quarter. If you get two companies bidding against each other, a 1% gross spread can easily become 10% by the time everything is said and done.

We saw the Salix Pharmaceuticals (SLXP)–Valeant Pharmaceuticals (VRX) transaction get competitive, and arbs were rewarded with an 11% return over three weeks. Could the Pharmacyclics–AbbVie merger get broken up by an interloper?

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It looks like the auction took place prior to the deal

While it doesn’t appear there was a disclosure of the background of the transaction in the tender offer documents, press reports show that Pharmacyclics, Inc. (PCYC) ran a very quick auction. We know the company hired bankers to examine strategic alternatives, which usually means an auction.

The most logical acquirer would be Johnson & Johnson (JNJ) since it already has a 50% stake in Imbruvica. So it appears that JNJ passed on the transaction.

Did the bankers contact all potential buyers? We can never know, but the fact that JNJ passed on the deal and that it won’t be accretive to AbbVie Inc. (ABBV) for a couple of years indicates AbbVie paid a lot for Pharmacyclics. AbbVie clearly wanted to reduce its reliance on Humira since the drug is coming off patent.

So while it’s not out of the question that someone else could come in, it looks like the auction has already happened.

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).

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