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 Pharmacyclics–AbbVie merger is a tender, meaning there are no shareholder votes required. Tender deals tend to have very short timelines because there’s no need to get a proxy statement through the SEC (U.S. Securities and Exchange Commission) and no waiting period to schedule a vote. Shareholders can elect to receive cash, stock, or a mixture of cash and stock.
Elections sometimes give you a little extra
This deal provides for Pharmacyclics, Inc. (PCYC) shareholders to receive $261.25 in cash, AbbVie Inc. (ABBV) stock, or a mixture of cash and stock. The ratio for the amount of stock is based on an averaging period before the deal closes. If the stock moves after the ratio is set, then the actual value of the consideration may change.
I’ll discuss the mechanics of cash and stock elections later in the series. However, it’s important to understand that if you play your cards right, you’ll get at least $261.25 and possibly a little more. This means you should make at least 6.2%, provided the deal closes by June 30. Note that this deal’s election was structured to make the potential bonus as small as possible.
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.
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).