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 IGATE (IGTE)–Capgemini (CAPMF) merger is a cash deal, with a shareholder vote and a deal with the three biggest holders. The companies have 30 days from the date of the merger agreement to consent. It’s slated to close in the second half of 2015, although it should be done before September 30.
The spread is tight, but there was no process
It looks like the merger was negotiated very quickly, and there was no process run. This means there was no auction for IGATE prior to the announcement, so there’s a theoretical possibility that another buyer could emerge. The merger agreement allows a 30-day period for the company to cooperate with a potential suitor.
The spread is trading tight due to the lack of a process. Once the 30-day period is up, the spread should widen out slightly to reflect the lower probability of a topping bid.
One thing to note is that the merger agreement specifies the need for the deal to be reviewed according to the provisions of the Hart-Scott-Rodino Antitrust Improvements Act. The deal must also obtain any pertinent foreign antitrust approvals as well as approval from the Committee for Foreign Investment in the United States.
Merger arbitrage resources
Other important merger spreads include the deal between Baker Hughes (BHI) and Halliburton (HAL) or the merger between Pharmacyclics (PCYC) and AbbVie (ABBV). 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 tech sector should look at the Sector SPDR Trust SBI Interest (XLK).