Arbitrage M&A: Talecris & Grifols

The M&A arbitrage arises as an opportunity to benefit from the spread between the bidding price, and the market price. The biggest risk associated with this strategy is that the bidding firm would withdraw its offer (which is not in the interest of the investment bank); and the biggest opportunity would be associated with a bidding war, in which third companies bid above the previous offer.

Research has shown higher stakes in the target firms on behalf of the investment banks advising both the bidder and the target firm (especially the former); but I do not remember how developed is the research about the profitability of the arbitrage opportunities.

One book covering the issue is Warren Buffett and the Art of Stock Arbitrage, from which this is an excerpt:

In professors Gerald Martin and John Puthenpurackal's study of Berkshire Hathaway's stock portfolio's performance from 1980 to 2003, they discovered that the portfolio's 261 individual investments had an average annualized rate of return of 39.3%. Even more amazing was that out of those 261 investments, 59 of them were identified as arbitrage deals. And those 59 arbitrage deals produced an average annualized rate of return of 81.28%! Warren's arbitrage performance not only beat his regular portfolio's performance, it also stomped the average annualized performance of every other investment option in America by a mile. No one - be it individual or firm - even came close...

... good to know.

Elsewhere, the M&A deals covering companies listed in different currencies will have attached a 'currency risk', for which investors should ask a compensation.

For all these reasons, I have become interested in the Grifols bid for Talecris.

Grifols is bidding $19/share and 0,6485 own shares/talecris share.
With the former trading at around 14 eur/share, the latter could be priced at around 32,5 usd/share (assuming the bid would be successful).

I think it is a good risk/return opportunity and I have bought today some shares,
TLCR (nasdaq) @ 27,5usd/share.
More info about this deal can be found in the web, e.g.: bloomberg.

... will see how it ends.

Here there are some raw-sources for arbitrage-driven trades: sinletter, mergerinvesting, theonlineinvestor and here the required due-diligence and storytelling: dealbook, reuters.