Merger spread analysis
To perform merger arbitrage, the investor will generally buy the stock of the company being acquired, sell short the relevant ratio of the acquirer’s stock—if applicable—and wait for the deal to close. When the merger is completed, the investor will exchange the stock of the company being acquired for the deal consideration.
In this case, we don’t have a deal, we have a bear hug letter. Simon Property (SPG) has proposed to buy Macerich (MAC) for $91 a share, half of which will be cash and half of which will be SPG stock at a fixed ratio.
Based on the closing price of Simon Property on March 6, that works out to a merger consideration of $45.50 in cash and .252 Simon Property shares. Note that Simon has not disclosed the actual ratio, so they could have a different ratio in mind. If you set up the spread based on these assumed terms, you would have a slightly negative annualized rate of return.
Hostile deals are different
The key to the Macerich–Simon Property merger is understanding the process that companies go through when approached with an unsolicited proposal. Simon Property initially took a stake in Macerich in early November, which began the run-up in their stock.
Simon later sent a letter to Macerich proposing to buy the company. Macerich has acknowledged receipt of the letter and is formulating its response. Though this deal is hostile, it’s important to remember that most hostile deals end up being friendly. Despite all of the drama, this is simply a negotiation over price. Corporate CEOs have a fiduciary duty to their shareholders and the “just say no” defense usually doesn’t cut it.
Other merger arbitrage resources
Other important merger spreads include the Hospira–Pfizer deal. The Hospira (HSP) and Pfizer (PFE) merger is set to close in 2H15. 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 REIT sector should look at the Vanguard REIT ETF (VNQ).