TIAA Buys Everbank to Boost Its Banking Business

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.

On August 8, 2016, TIAA and Everbank (EVER) announced a merger in which TIAA will purchase Everbank for $19.50 per share in cash, or ~$2.5 billion. Everbank is a Jacksonville, Florida, commercial bank with ~$27.4 billion in assets.

The merger will expand TIAA’s financial offerings, particularly mortgage origination—Everbank is a major player in the space. Everbank is big in correspondent lending, which involves buying mortgages originated by other lenders. TIAA is a major asset manager. It will find itself with a steady stream of mortgage product to put into its retirement funds. TIAA is a financial services company that has historically served government and academia. The companies are guiding to close in 1H17=.

TIAA has a voting agreement with shareholders controlling 22% of the vote to support the deal.

Assuming you buy Everbank at its current level, the spread works out to be about 4.1% annualized using a closing date of March 31, 2017. As far as merger arbitrage returns, that’s a typical spread. This is a relatively low-risk transaction, at least regulatory-wise.

Other important merger spreads include the Valspar (VAL) and Sherwin-Williams (SHW) deal and the Whitewave (WWAV) and Danone deal. 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 financial sector should look at the S&P SPDR Financial ETF (XLF).