By Vertex One Asset Management
The Vertex Arbitrage Fund launched on October 31st. The fund finished the year almost fully invested in over 20 deals. A significant number of our more meaningful positions are Canadian opportunities that are slightly off the radar and offer an attractive risk/reward. A significant component of the performance this quarter came from our short position in Cooper Tire. It is not uncommon for us to short takeover targets (in friendly, announced mergers) where we believe the market is mispricing the likelihood of the transaction not being completed. Typically, we might have 1-2 short positions (anticipating deal failure, separate from our short positions to hedge deals we expect to close) in the arbitrage portfolio at any given time.
We believe that conditions are ripe for strong M&A activity in 2014, and as 2013 drew to a close we saw a flurry of new deals announced with speculation of some very large deals in the pipeline. Equity markets are buoyant and financing markets remain open to deals. While CEO confidence might remain somewhat muted until we are through the initial phases of Fed tapering, we also expect management teams to realize that the era of cheap money “forever” might be closing. This may encourage potential buyers to act sooner rather than later. Additionally, we have seen some very positive stock price reactions for acquiring companies doing accretive deals and this should support confidence and spur stronger activity.
Demonstrated above, the quantity of deals remains high but volume continues to lag. Although we would welcome an increase in the value of deals announced, there is always enough activity for us to find opportunities. We’ll consider it a bonus when activity and volume rise substantially.