Sentieo for Merger Arbitrage


As merger spreads have widened considerably during this period of extreme market volatility, we’ve had a number of people ask how to use our platform for merger arbitrage research. In this post, we’ll cover several ways to do so. At the bottom of the post, we’ve also included a list of selected currently pending cash transactions that you can simply copy and paste into your Sentieo Watchlists for easy recall. You can use the watchlist everywhere in Sentieo: search documents at once, look at financial metrics, visualize financial and alternative data, set alerts, create scatterplots, and more. 

How Tight is the Merger Agreement

When a cash deal is announced, typically the target stock trades close to the offer price, with several factors at play: likelihood of higher offers, financing availability/deal size, regulatory considerations to name a few. One of the key factors in these transactions is how tight the merger agreement is: under what circumstances the acquirer can walk, and what would it cost (the termination fee). We will look at some aspects of these using our doc search further down. 

Part of the widening of the spreads that we are seeing is that the starting recession has made buyers more likely to try to get out of the deal, and big financing packages will be very hard to put together. This all increases the risk that the deal may fall through, and this increased risk is reflected in the spreads. 

So what does the widening look like? Here we have brought in our watchlist in Plotter, our data visualization tool. In order to get a quick look at what has been happening, we are displaying the stock prices one by one. Here we are looking at aircraft lessor Aircastle Limited (AYR) by a Japanese consortium for $32/share (this is the initial jump on this six-month chart). The stock traded pretty close to the offer price until the recent market turmoil. It has now dropped to $28, indicating the increased risks around the deal.

Try the chart for yourself in our public chart viewer: click on any data set in the bottom to show/hide. Interestingly, one transaction from our list did close as we were writing this piece: YUM! Brands completed the acquisition of The Habit Burger (HABT).

The Material Adverse Change Clause

The single largest concern around these transactions is contained in a section of the merger agreement called Material Adverse Change clause, or MAC, for short. Finding the MACs is easy: we simply bring in our list of pending targets in the doc search, and search all filings for “material adverse.” We could also search specifically for the DEM14A forms but we want to keep a wider net. 

What does a clause look like? In short, it is dense. This is from the agreement between Tiffany’s (TIF) and LVMH. We can see that general business conditions are excluded, as are things like changes in the market price of the target, legal changes, accounting standard changes, natural disasters, and more. None of these would count as a material adverse change. The agreement itself is almost 300 pages which makes having our industry-leading document search essential to your work. We can also redline any SEC documents to spot changes. 

The Impact of COVID-19

One of the most important questions now is whether the COVID-19 outbreak will result in problems for some of these deals. We can structure a broader query to spot language around epidemics, pandemics, outbreaks, or natural disasters. In the screenshot below, we can see the snippet from a Legg Mason (LM) filing detailing that specific exclusion in their agreement with Franklin Templeton (BEN). 

But your work does not stop here!

Using our built-in highlighter, you can highlight and collect the specific language across merger agreements to share and discuss with your team. Here we have highlighted the relevant passage, and we are creating a new label called “MAC”

We continue to collect our highlights from other merger agreements as we read, never leaving the Document Search. Here we have highlighted the AYR agreement. 

Research Management, Even at Home

Where do these highlights go? They are all collected in our purpose-built research management system where they can be combined into longer notes, shared with the team, sent to new or existing theses, and more. This is what our combined highlights look like inside the Sentieo RMS. We have entered text, we dragged the highlights (all linking to the source documents), and we are sharing with our team. The team can then add comments, use in theses, and more. To see how your team can collaborate remotely, please watch our “Work from Home” webinar

In case you would like to use our list, here are the tickers that you can simply copy and paste in your Sentieo as a new watchlist: 

ACIA ADSW AXE AYR BREW CY EE FIT KEM LM LOGM MLNX NAV RARX TECD TGE TIF WBC WMGI 

If you would like to see how Sentieo can take your workflow to the next level, please get in touch