Just like that, the bidding war is over
On February 22, 2015, Valeant (VRX) announced that it had an agreed transaction with Salix Pharmaceuticals (SLXP) structured as a tender-off at $158 a share. You can find a more in-depth review of that transaction in Valeant makes yet another acquisition: Salix Pharmaceuticals. On March 11, Endo International (ENDP) made a conditional offer for Salix at a headline value of $175 per share, payable in a combination of cash and stock. You can find a more in-depth review of that offer here at Endo Enters the Picture: The Salix Situation Gets Competitive. On March 16, Valeant raised its offer from $158 in cash to $173 in cash, which Salix accepted. Endo withdrew from the bidding process soon thereafter.
Competitive deals can make an arbitrageur’s quarter
Merger arbitrage professionals make their money two ways: by being in the competitive deals and avoiding the land mines. While avoiding the land mines is by far more important, competitive deals are what turn a pedestrian return in plain, vanilla deals into something good.
In the Salix case, there were a few clues in Valeant’s behavior that indicated that the deal could get competitive. Salix has a major FDA ruling coming up in May, and it would be entirely appropriate for Valeant to give itself an out if the drug fails. Valeant instead chose to close the deal before the ruling and agreed to buy Salix even if the FDA ruled against the drug. Second, US companies don’t usually structure large mergers as tender offers. When they do, the choice indicates that the buyer wants to move fast.
So, assuming you set up the transaction after the deal was announced, you made about $17 (or 11.1% gross) over three weeks. Not a bad day at the office.
Other merger arbitrage resources
Other important merger spreads include the deal between Hospira (HSP) and Pfizer (PFE). 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 healthcare sector should look at the Health Care Select Sector SPDR Fund (XLV).
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