Need More Income? Consider This Merger Arbitrage Play
Trying to predict – and invest in – the market’s next takeover targets is one of the most difficult things to do.
And when the takeover isn’t much of a secret, the potential profits are much smaller or, even worse, non-existent.
But here’s the good news…
We can take all the guesswork – and most of the risk – out of the equation and still take tidy profits by investing in takeover targets. How so?
By employing a strategy known as a merger arbitrage.
It’s not complicated. It simply means that you wait until after a takeover deal is announced.
I know… it sounds counterintuitive to think that such a strategy actually works.
But the truth is, it’s been a mainstay in institutional and high-net-worth portfolios for decades.
You think the mega rich would waste their time on a strategy that doesn’t yield worthwhile results? Yeah, me neither.
That’s precisely why I’ve been on a crusade since August 2012 to convince everyday investors that they can use merger arbitrage to easily boost their income, too.
The Safest Way to Wallop the Market Average
I’ve already shown readers four different opportunities to pocket safe yields of 5% or more.
At first glance, that yield might not sound like much. But understand that it’s not an annual yield. Instead, it’s based on the holding period for each recommendation – about 30 days.
So, if we annualize it, we’re talking about the potential for 60% yields if we invested in back-to-back deals over the course of a year.
Now, I’ll concede that stringing together 12 straight merger arbitrage trades is unlikely. But it’s perfectly reasonable to string three or four deals together over the course of a year, resulting in annual yields of 15% to 20%.
That thrashes the going rate for money market accounts – a measly 0.7% per year, according to BankRate.com.
So today, I’m going to share another merger arbitrage opportunity, which should allow you to pocket about 5% in the next 90 days or so.
But first, let’s cover two critical ground rules…
Boiling Merger Arbitrage Down to Two Simple Steps
As you know, no investment is ever truly risk-free. So to maximize our yield and success rate, here are two factors I always keep in mind when considering merger arbitrage opportunities…
- Cash is Always King! Focus on all-cash deals. They’re the simplest, cleanest and most cost-effective. All we do is buy shares of the target company and then wait. When the takeover closes, the cash equivalent of the full offer price appears in our accounts. And presto… we’ve earned the spread in the process.
- Settle for Above Average: There’s never a good time to chase yield. And merger arbitrage investing is no exception. While a double-digit yield looks attractive, it often indicates uncertainty about whether a takeover deal will actually be finalized. And if a deal falls through, so does our income. Accordingly, we should shun the highest-yielding deals in favor of slightly above-average merger arbitrage spreads – anywhere from 5% to 8%.
So now that we’re all on the same page, let’s get to the opportunity…
Pump Up Your Income With HOGS
In March 2012, the Chairman and CEO of China-based meat and food processing company, Zhongpin Inc. (HOGS), submitted a non-binding proposal to take the company private. Then, in late November 2012, the company entered into a definitive agreement.
Terms of the deal call for shareholders to receive $13.50 per share in cash once the deal closes. And it’s expected to do so by June 30, although it’s likely to occur sooner.
The fact that China Development Bank is providing funding for the purchase provides ample assurance that it’s going to be completed as planned, too.
Based on HOGS’ current share price of $12.81, the spread checks in at 5.38%, which is comfortably above our 5% minimum yield target.
So to take advantage of this opportunity, make sure you buy HOGS shares at $12.86 or lower – the price at which the spread hits that 5% number.
Ahead of the tape,
P.S. If you’re looking for an opportunity to earn a 5% yield even faster, it’s not too late to act on the pending deal for Outdoor Channel Holdings (OUTD). For all the details, check out my original analysis here.