MANDA Updates: Completions, additions, and management notes

Here’s recent news and notes concerning my mergers and acquisitions arbitrage fund, MANDA.

Recent completions
Natural gas master limited partnership Hiland Limited Partners (HLND) was acquired on December 4 by Howard Hamm. Originally, the deal price was set at $7.75 in cash per HLND share but it was upped to $10 on October 27, possibly in relation to pending lawsuits opposing the acquisition. This represents a 35% gain on the trade—not too shabby!

Lion Holdings completed its acquisition of Life Sciences Research (LSR) just before Thanksgiving (11/24) for the originally offered $8.50 per share in cash. This trade netted over 6% in the portfolio.

New addition
Today, Apollo Global Management made an offer of $11.50 per share for amusement park operator Cedar Fair (FUN—gotta love the stock symbol!). Cedar Fair is a limited partnership that traded as near $12 last summer and as high as $30 in 2007. Naturally, this sparked a unitholder lawsuit and I’m thinking that the bid could possibly be revised up to $12, but even if it isn’t the company will still pay out at least one of its quarterly dividends in February before the deal closes as projected early in the second quarter of next year. I picked up the stock today at $11.20 per share.

Overall MANDA performance
The portfolio is up almost 6% since inception. No, it’s not a terrific return but considering that many well-managed funds lost 30% and upwards last year, any positive return is a cause for celebration. Out of the 21 closed positions, only 3 were losers, and that, too, ain’t a bad stat.

The revised portfolio holdings are given at the end of the article.

The future of the MANDA portfolio
Looking forward to next year, I may close this fund. My reasons are two-fold: One is that I was doing this to provide my readers with a conservative investment scheme that they could easily replicate themselves and which would hopefully supply a positive return during this past recessionary market. I think I have accomplished this goal and now that the recession may be drawing to a close, I feel that there are other investment methodologies that will easily outperform this one.

The second reason is that even though this fund was fun for me to manage, I, too, am looking forward to expanding my horizons, moving into other areas and developing new products. I’m also thinking of starting another fund that would be reader interactive; for the moment, though, it’s just a thought, but who knows, so stay tuned!

Notes on other M&A arbitrage funds
There are several M&A arbitrage funds out there along with a new one, the IQ ARB Merger Arbitrage ETF (symbol: MNA), that began trading on the ARCX in the middle of October. One big difference between my MANDA fund and these others is that to make it easy for you home-gamers to follow and implement, I restricted my holdings to cash deals, although in the interests of full disclosure I did have one that involved cash and a stock swap.

In some of these other funds, stock swap trades are frequently used. The problem with this type of deal is that if the acquiring company’s stock drops in value, so does the value of the stock of the company that is being acquired resulting in an overall loss for the investor. To hedge against this scenario, most managers typically will buy put options on the acquiring company at the time when the stock of the company being acquired is bought. This locks in the arbitrage amount (the difference between the buy price and the final settlement price at deal close).

I avoided adding this type of play because in order to realize the maximum gain, one needs to be a fairly savvy options trader. Options do carry risk so in that respect alone, I didn’t think it would be appropriate for the average home investor, especially considering that the MANDA portfolio was designed to be a low-risk methodology.

Trading Notes: If you’re interested in using put options to protect a stock-swap arbitrage, I’d like to offer a couple of suggestions:
1.Buy deep in the money puts to maximize your delta. Note that this expenditure will eat into your working capital!
2.Buy puts with expiration dates a few months after the expected deal close (if you can). Sometimes deal close dates can be extended due to unforeseen lawsuits and regulatory issues, to name the most common causes.
3.Watch implied volatility on your put options as that can eat into your profit.

MANDA Update 12-17-09

Leave a Reply

You must be logged in to post a comment.