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Big Semiconductor Deal: The SanDisk-Western Digital Merger

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Merger arbitrage

To perform merger arbitrage, an investor generally buys the stock of the company being acquired, short-sells the relevant ratio of the acquirer’s stock, if applicable, and waits for the deal to close. When the merger is complete, the investor exchanges the stock of the company being acquired for the amount agreed upon in the deal.

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Another big deal in the semiconductor space

On Wednesday, October 21, Western Digital (WDC) agreed to buy SanDisk (SNDK) in yet another big deal in the semiconductor space. On the same day, Lam Research (LRCX) agreed to buy KLA-Tencor (KLAC). Rising costs and the maturation of the market for personal computers and smartphones are putting pressure on semiconductor manufacturers to merge in order to cut costs. The customers for these companies are also merging, which leads to another catalyst for mergers—the opportunity to enhance negotiating power with bigger customers.

Basics of the arbitrage spread

The SanDisk-Western Digital merger is subject to customary closing conditions and regulatory approvals. According to the press release, the deal is expected to close in the third quarter of 2016. If you assume a closing date of September 30, 2016, then the spread is trading at an annualized rate of 14.5%. This is a somewhat wide spread, and it reflects the uncertainty regarding the actual consideration SanDisk shareholders will receive and the fact that antitrust regulators have been taking a more aggressive stance toward mergers in this sector. The proposed merger between Applied Materials (AMAT) and Tokyo Electron fell apart earlier this year after stiff resistance from the U.S. Department of Justice.

Merger arbitrage resources

Other important merger spreads include the deal between Baker Hughes (BHI) and Halliburton (HAL) and the merger between Freescale Semiconductor (FSL) and NXP Semiconductors (NXPI). 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 can look at the S&P SPDR Technology Select ETF (XLK).

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