In 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 on in the deal.
Envision and Amsurg announce a merger
On June 15, Amsurg (AMSG) and Envision (EVHC) announced a merger where Envision shareholders would receive 0.334 shares of Amsurg common stock for each share of Envision they hold. Officially, it appears that Amsurg is the buyer. However, this deal has a lot more in common with a merger of equals. Envision will hold 53% of the new company and Amsurg will hold 47%. The board will be split equally between Envision and Amsurg’s directors. Management will be split as well. The tell-tale sign that it’s a merger of equals is the fact that there isn’t a control premium being paid.
The companies are guiding to close by the end of the year—this might be optimistic. There are some overlaps that could potentially concern antitrust authorities. Lately, the US government took a dim view of mergers in the healthcare space. It could end up taking a closer look. Assuming that the deal closes as advertised, the spread works out to be 1.5% gross or about 2.8% annualized. As a general rule, merger spreads for a merger of equals tend to trade relatively tight given that there isn’t any control premium being paid. If the deal breaks for antitrust reasons, the downside is much less. Second, mergers of equals will sometimes attract competing buyers because the interloper doesn’t have to compete with someone who is already paying an elevated price.
Other merger arbitrage resources
Other important merger spreads include the Cigna (CI)-Anthem (ANTM) deal. It’s slated to close in 2H15. 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 healthcare sector should look at the S&P SPDR Healthcare ETF (XLV).