Will Arbs Assemble the Microsoft-LinkedIn Arbitrage Spread?



Spread is trading about right

In the risk arbitrage world, a 5.2% annualized return is about right for a strategic deal with not much in the way of regulatory risk. The main regulatory risk would be the timing risk. The chance of regulators blocking the transaction is pretty low given that LinkedIn (LNKD) and Microsoft (MSFT) don’t compete directly. The risk-to-reward ratio of 15:1 is about normal for a strategic transaction.

Arbitrageurs will probably want to have some of this deal on the pad simply because it’s a big, strategic deal. Microsoft is a quality buyer and the deal is highly liquid. Arbs always struggle with finding enough big, liquid deals in which to put money to work.

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A competing buyer is possible, but not likely

Microsoft is buying LinkedIn to help transform its business. It wants to focus more on cloud-based offerings. There are all sorts of potential synergies between Microsoft Office 365 and LinkedIn. That said, LinkedIn is a unique property. Other companies with huge cash hoards might find LinkedIn attractive. That said, very few buyers are going to want to get into a bidding war with Microsoft due to its resources. Arbs will be quick to look at the background of the merger to see if LinkedIn conducted any sort of market check.

Generally speaking, this deal could become a core position for arb desks, especially if the spread widens out to a high single-digit annualized return.

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).


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