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It was after billionaire entrepreneur Elon Musk first threatened to walk away from his US$44-billion takeover offer for Twitter Inc. last June that portfolio manager Amar Pandya decided to invest in the social media company.
Mr. Pandya of PenderFund Capital Management Ltd. in Vancouver bought the stock in the mid-to-high US$30 range – well below the takeover price of US$54.20 a share – betting the deal would eventually get done.
“It was based on my view that he was legally obligated to close the deal at the initial deal terms,” says Mr. Pandya, who manages the Pender Alternative Arbitrage Fund.
The deal finally closed in October at the original offer price, earning PenderFund a tidy profit.
It was one of the hundreds of deals PenderFund has invested in as part of the firm’s merger arbitrage strategy. Other recent deals include the long-awaited Rogers Communications Inc. RCI-B-T $26-billion purchase of Shaw Communications Inc. SJR-B-T, which recently closed, and the takeover of Freshii Inc. FRII-T by private company Foodtastic Inc. late last year.
Mr. Pandya says the fund has 30 to 40 merger arbitrage holdings at one time with an average holding period of three to five months.
“We invest in more than 100 deals a year,” he says.
Globe Advisor spoke with Mr. Pandya recently about how merger arbitrage works and the role it can play in investment portfolios.
Describe what merger arbitrage is in the investing world.
Merger arbitrage is an investment strategy in which you seek to profit from completed mergers and acquisitions. You’re trying to capture the spread from when a merger deal is announced until it’s ultimately completed.
Our fund, and typically with a merger arbitrage strategy, you’re only investing in legally binding mergers where there’s a definitive agreement in place signed by the board of directors that obligates both the target company and the acquirer to fulfil that merger. It’s a strategy used for decades; Warren Buffett used it extensively in the 1970s and 1980s.
How can merger arbitrage be used in a broader portfolio?
Merger arbitrage is a great diversifier in any portfolio. It’s low risk with a low correlation to equities and bonds. The investment is also short term, with a typical deal taking three to five months.
It’s also tax efficient as the returns are taxed as capital gains, not interest income. Historically, it has also exhibited a positive correlation with interest rates; the returns increase as rates increase. So, it’s an effective interest rate hedge, which is particularly interesting in this environment we’re in right now, in which interest rates have been rising.
What are the risks?
There are timing and deal risks. Timing risk is associated with how complex a deal is and how many regulatory approvals are required. Take the Rogers-Shaw deal, for instance, which was supposed to close in the spring of 2022 and just closed a few days ago.
The internal rate of return, or IRR – the annual growth rate that an investment is expected to generate – is lower as a result. Deal risk is the risk of the agreement being terminated.
What is your focus in this area?
While we did invest in the Twitter and Rogers-Shaw deals, we are much more of a small- and mid-cap-focused fund. The benefit of that positioning is that small- and mid-cap mergers have a higher potential and probability of closing and in a much shorter period.
This interview has been edited and condensed.
- Brenda Bouw, Globe Advisor reporter
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