In this challenging market, one area that has seen some positive news is merger arbitrage.
Two large deals including the acquisition of Discover Financial Services
$DFS by Capital One
$COF and the acquisition of U.S. Steel
$X by Nippon Steel saw positive developments.
The DOJ decided not to block the
$DFS deal and it will now be reviewed by both the Federal Reserve and the OCC.
The spread on this deal, which was almost 12% last week, collapsed to around 4%.
We also had an unusual development with
$X where the Trump administration referred the deal to a second review by CFIUS, the committee that reviews acquisitions by foreign companies for national security concerns.
The market is taking this as a signal that at the end of this second review, if trade relations remain normalized between the U.S. and Japan, the deal will go through. The spread collapsed to 23.6%, which means there is still significant upside left in case the deal succeeds.
The large spread also reflects that the deal is not out of troubled waters just yet. An options play might make more sense here instead of going long the common stock.
We also saw positive developments for deals like First Financial Northwest
$FFNW and Desktop Metal
$DM that came back from the dead.
The merger arbitrage strategy continues to provide counter-cyclical opportunities during times of market distress.