Private equity deals are risky right now
Lately, the deal flow for arbitrageurs has been dominated by inversion transactions and deals with a lot of antitrust risk. Health insurance mergers have tremendously wide spreads, and inversion deals will likely be political footballs during election season. There really haven’t been many easy deals to work with. The recent Alere (ALR) and Abbott (ABT) deal is one, but most other deals have had some major risks attached to them.
In a different financial environment, the ADT (ADT) and Apollo (APO) deal would probably be considered a lower risk transaction. The fact that there is a strategic partner and it isn’t just a cheap financing play does make it much safer than the garden-variety private equity deal.
That said, any arb who has been around awhile knows that in periods of financial stress, particularly in the high yield market, the playbook says you must reduce or eliminate your exposure to private equity transactions. Arbs got absolutely buried in late 2008 in some big private equity deals that blew up or were renegotiated lower. Old timers will remember the same thing happening during the Long Term Capital Management blowup as well.
So while the spread appears attractive, arbs are probably going to give this one a wide berth, at least until the high yield market, which you can trade via the Ishares Iboxx High Yield ETF (HYG), has turned around and looks to have settled in.
Merger arbitrage resources
Other important merger spreads include the deal between Baker Hughes (BHI) and Halliburton (HAL) and KLA-Tencor (KLAC) and Lam Research (LRCX). 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 iShares Global Technology ETF (IXN).