In merger arbitrage, an investor generally buys the stock of a 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.
Largest public apartment REIT
On August 15, 2016, Post Properties (PPS) and Mid-America Apartment Communities (MAA) announced a deal where Mid-America will purchase Post Properties for ~$4.5 billion in stock and assumed debt. Post Properties shareholders will receive 0.71 shares of Mid-America for each share they hold. Both companies will pay their respective dividends during the pendency of the merger. They will schedule dividend payments so that both Post Properties and Mid-America shareholders get a dividend before the deal closes. The companies anticipate closing the deal in the fourth quarter. Assuming the typical four-month timeline for a merger with a shareholder vote, closing by the end of the year looks reasonable.
Assuming you buy Post Properties and sell short Mid-America at the current levels, the spread works out to be ~2.8% annualized using a closing date of December 31. As far as merger arbitrage returns, that’s a typical spread. This is a relatively low-risk transaction, at least regulatory-wise.
Other merger arbitrage resources
Other important merger spreads include the merger between Valspar (VAL) and Sherwin-Williams (SHW). 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 REIT sector can look at the Vanguard REIT ETF (VNQ).