Will the ARM Holdings-Softbank Merger Attract Arbitrageurs?



Big, safe liquid deals are rare these days

Arbitrageurs will certainly be interested in setting up the ARM Holdings (ARMH) spread, especially if they can get an 8% return using the ordinary shares and get access to a swap agreement or a certificate of differences in order to sidestep the 50 basis point stamp tax in the United Kingdom. For hedge funds, this is easy. Virtually every international investment bank has a derivatives desk that will set up the swap agreement. Very few arbitrageurs will be interested in setting up the spread through US-traded ADRs (American depositary receipts). There isn’t a reason to do it that way.

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The spread of 8% and the risk-reward ratio of 12x is reasonably attractive for a transaction like this. There isn’t antitrust or regulatory risk to worry about. There is some potential for a topping bid, but we won’t know much about that until the scheme document is finally released. Assuming the transaction gets done before the drop dead date of November 17 (which is waivable by Softbank in any event) the spread is attractive. When you look at the big liquid transactions that are available at the moment, many are fraught with risk (especially the health insurer deals which look like they will be blocked). This deal is big, boring, and can put a lot of money to work. It will probably end up being a core position in virtually every European risk arbitrage book and probably most US ones as well.

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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