To perform merger arbitrage, an investor will generally buy the stock of the company being acquired, short-sell the relevant ratio of the acquirer’s stock, if applicable, and wait for the deal to close. When the merger is complete, the investor will exchange the stock of the company being acquired for the deal consideration.
A complementary deal in the oil patch
As oil prices have fallen, energy companies are facing more pressure to merge. Schlumberger (SLB) is buying Cameron (CAM) for a combination of cash and stock. Cameron shareholders will receive $14.44 in cash and 0.716 shares of Schlumberger.
In a press release, Schlumberger stated the merger would create a “pore to pipeline” products and services company. Cameron is an equipment company and Schlumberger is an energy services company. While there will be cost synergies (at least at the corporate level), most of the synergies are expected to be revenue synergies. Cameron should be able to leverage Schlumberger’s relationships with major oil companies.
Basics of the arbitrage spread
The deal is subject to customary closing conditions and regulatory approvals. According to the press release, the deal is expected to close in the first quarter of 2016. If you assume a closing date of March 31, 2016, then the spread is trading at 6.1% annualized. This is a typical spread, given the fact that there really isn’t much in the way of overlap, so the companies might be able to escape without a second request by the regulators. That said, given the ongoing review of the Baker Hughes-Halliburton deal, the regulators might issue a second request just to understand the industry dynamics better.
Other merger arbitrage resources
Other important merger spreads include the deal between Baker Hughes (BHI) and Halliburton (HAL). For the basics on risk arbitrage investing, please refer to our series, Merger arbitrage must-knows: A key guide for investors.
Investors who would like diversified exposure to the financial sector should look at the S&P SPDR Energy ETF (XLE).