With almost all mergers, the rate of return is driven by the time it takes to finalize the transaction. In the case of the ADT (ADT) and Apollo (APO) merger, several conditions must be met before the transaction can close.
Apollo will need to file for merger approval under the Hart-Scott-Rodino Antitrust Improvements Act. In addition to Hart Scott Rodino, the companies will need to file for Canadian antitrust approval.
Professional arbitrageurs usually go to the respective companies’ Form 10-Ks to get a read on antitrust and to see if the companies name each other as competitors. In this case, ADT does name Protection One as a competitor. Other competitors named include Monitronics International, Vivint, Comcast (CMCSA), AT&T (T), Tyco (TYC), and Stanley Security Solutions, which is a subsidiary of Stanley Black and Decker (SWK). The antitrust authorities will take comfort in the fact that all of these competitors are large and well-capitalized. Overall, the companies characterize the home security market as “fragmented.”
The fact that ADT names Protection One as a competitor indicates that there is at least some antitrust risk, and the spread is handicapping that risk somewhat.
The companies agree to use reasonable best efforts to obtain antitrust approval and to cooperate with the antitrust authorities and each other to secure the deal. However, they are not required to make any divestitures or behavioral changes that would result in a loss of more than $80.5 million a month in revenues.
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).