Competitive deals are where arbs make their money
Traditionally, arbitrage desks would have a portfolio of 40–50 “safe” transactions, and these make up the bread and butter of their returns. The idea is to have a diverse enough portfolio that one blow up doesn’t ruin your quarter. Arbs will also keep a few deals on the blotter like this one, where there is the possibility of a competing bid. Bidding wars can generate much higher returns than normal deals, so it pays to have a few “flyers” like this one.
Arbs will treat this as a “flyer” and not have a large position in it. If a rumor is published in the press that Oracle or SAP is looking at the deal, they will build a position. If another buyer formally announces interest, that “flyer” position will become a core position pretty quickly.
In this situation, Salesforce.com is a serious buyer, and there really are very few things that can go wrong here. Antitrust is a non-issue, as Demandware has already reported earnings, and it isn’t a biotech where it’s reliant on a single drug in clinical trials. Realistically, the downside is probably that you will collect your 19 cents in 45 days. The upside is almost unbounded because multiples are irrelevant. That is the bull case. The bear case is that this is the classic merger arbitrage “picking up nickels in front of a steamroller” position. You could make 19 cents or lose 27 bucks.
They won’t have a big position, but arbs will probably have some of this on the pad anyway. The lack of an agreement between the biggest two shareholders and the fact that this was done as a tender offer (you choose the quick timeframe of a tender offer when you want to close fast before someone else swoops in) signals that there is a chance that good things can happen.
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).