It’s time to lock and reload!
Back in August, I alerted you to two compelling merger arbitrage plays – CIC Energy and Gushan Environmental Energy Ltd.
Well, both deals closed, as expected – handing investors yields of 6% in less than a month. That sure beats the paltry yields offered by U.S. Treasuries.[ad#Google Adsense 336×280-IA]Of course, the real power of merger arbitrage investing comes in when we invest in successive deals.
With that in mind, I’ve uncovered another opportunity for you to consider.
The deal is expected to close before the end of the year and sports a 7.8% yield.
Before I get to all the details, though, here’s a quick refresher course on how to go about finding the best merger arbitrage opportunities…
Two Keys to Successful Merger Arbitrage Investing
Merger arbitrage is a way to profit from takeovers in a reliable and safe manner.
It involves investing in a company after a takeover announcement is made. So there’s no speculation involved.
That being said, it isn’t completely risk-free. To maximize our yield and our success rate, here are two factors we need to keep in mind…
1. Cash Only, Please! When evaluating opportunities, we always want to focus on all-cash deals, as opposed to cash and stock or all-stock deals. The reason? Because it’s simpler and cheaper. It only involves purchasing one stock – and, therefore, we only incur one trading commission.
All we do is buy shares of the target company… and wait. When the takeover closes, the cash equivalent of the full offer price appears in our account. And we’ll have earned the spread in the process.
2. Don’t Be a Yield Hog. I’ve said it countless times before: Chasing yield is a bad idea. And merger arbitrage investing is no exception to this principle.
While a double-digit yield might be tempting, it often indicates uncertainty about whether or not a takeover deal will be finalized. And if the deal falls through, so does our income.
With that in mind, I suggest looking for slightly above-average merger arbitrage spreads of about 6% to 8%.
Now that we’ve covered the keys to merger arbitrage investing, it’s time to get to the latest opportunity…
Pocket an Extra 7.8% Before the Year’s Out
On September 17, BGI-Shenzhen, a Chinese operator of genome-sequencing centers, announced an agreement to acquire Complete Genomics (Nasdaq: GNOM) for about $117.6 million.
The purchase price works out to $3.15 per share. And based on the current stock price, the spread checks-in at an attractive 7.8%.
The deal’s expected to close by early next year, but here’s the catch : The tender offer for shares ends on Wednesday, November 21, 2012. That means in order to earn the spread, investors need to purchase the stock ahead of this date and agree to tender them to BGI-Shenzhen for $3.15 per share.
Like I said before, we should insist on at least a 6% yield on merger arbitrage investments. That means we need to purchase Complete Genomics for $2.97 or less.
So use a limit order if you decide to take advantage of this opportunity. And be patient.
Rest assured, I’ll be in touch with additional compelling opportunities as they materialize, too.
Source: Dividends and Income Daily