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.
Salesforce acquires Demandware for $2.8 billion
On June 1, Salesforce.com (CRM) announced it was buying e-commerce cloud computing provider Demandware (DWRE) in a $2.8 billion transaction. Net of cash, the consideration works out to be just about $2.6 billion. Demandware shareholders will receive $75 in cash, which is a sizeable premium of 56% compared to Demandware’s close the day before. The deal is structured as a cash tender offer, which means it will have a shorter timeline, closer to 45 days as opposed to the usual 120-day timeline for a merger requiring a shareholder vote.
The arbitrage spread is trading at $0.19, which is a 25 basis point gross spread. Assuming a close in mid-July, that works out to a 2.1% annualized return. This is an unusually tight spread, meaning the potential profit is very small, assuming the deal closes as advertised. This is a sign that the market is pricing in at least some possibility of another competing buyer. Ordinarily, the tight spread and the high risk-reward ratio would not tempt merger arbitrage professionals unless they were thinking about a bidding war.
Merger arbitrage resources
Other important merger spreads include the deal between Cigna (CI) and Anthem (ANTM) 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).