- This is the best time in years for setting up merger arb spreads.
- Here’s one more for a merger arb basket.
- 30% IRR over the coming months.
Merger arbitrage
All else being equal, it's better to own deal targets with strategic as opposed to strictly financial deals. The buyers have more reasons to want to close despite rocky equity and credit markets. Additionally, they don't need to get financing for the stock component of their deals.
Who?
Silicon Motion ( SIMO ) makes NAND flash controllers for solid state storage devices.
What?
MaxLinear ( MXL ) is buying Silicon Motion for $93.54 in cash and 0.388 MXL shares. The buyer is funding the $3.1 billion of cash consideration with their cash on hand and committed debt financing from Wells Fargo ( WFC ). The deal is not conditioned on that financing. They already have secured HSR approval. Remaining deal conditions include the target shareholder approval and Chinese SAMR review. There's no legitimate antitrust problem, but SAMR involves at least some random China risk. That application was filed on July 6, 2022.
Where?
The company is based in Hong Kong and operates in countries including Taiwan, the United States, South Korea, China, Malaysia, and Singapore.
Why?
The $24.55 net spread offers a 30% IRR if the deal closes in early August. This adequately compensates SIMO holders for the remaining deal risk.
Caveat
China can use SAMR punitively, so this one leaves holders exposed to a period of exposure to Chinese politicization of this process.
Conclusion
There's deal risk and timing risk - the companies originally expected to close sometime in the first half of next year. But there's substantial upside to that timing range. The deal could close sooner than earlier anticipated, perhaps as soon as next month, which makes the IRR worth the setup.
TL; DR
Buy SIMO.
For further details see:
Golden Age Of Arb: Silicon Motion