uploads/2015/06/BRCM_AVGO-headlines.png

Be Ready for a Rough Ride If You Set Up the Broadcom-Avago Merger

By

Updated

The annualized return is probably about right

In the Broadcom-Avago merger, you’re getting about an 8.9% annualized yield. That’s probably a reasonable return in such a low interest–rate environment, given the risks associated with the transaction. Since political risk is fundamentally unpredictable, you need to give it a wide berth.

The risk-reward ratio is being influenced by the behavior of Avago Technologies (AVGO) after it announced its deal with Broadcom (BRCM). Since Avago rallied on the deal announcement, it would make sense to presume it will return to its pre-deal price, but that’s not a given. Arbitrageurs will support the price at least initially as they cover their short positions.

Article continues below advertisement

So on one hand, you have a low risk-to-reward ratio. On the other hand, you have a pretty wide spread for a deal with some political hair on it. Given the size of the deal, most arbitrageurs would have at least a small position and be waiting anxiously for the preliminary proxy statement to come out to see what kind of process was run.

Given the political risk of this transaction, it will be susceptible to volatility based on comments from politicians who may want to establish their populist bona fides. For politicians, there’s really no downside to jawboning against an inversion. Arbitrageurs will take this into account and may want to trade the deal, loading up when some politician comes out against the deal and unwinding a bit when people get complacent. This deal probably will not accrete toward the final consideration like a “safe” deal will.

Other merger arbitrage resources

Other important merger spreads include the Freescale-NXP transaction. The Freescale Semiconductor (FSL) and NXP Semiconductors (NXPI) merger is expected to close by the end of the year. 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 semiconductor space should look at the VanEck Vectors Semiconductor ETF (SMH).

Advertisement

More From Market Realist