What Kind of “Events” Does ArbitrOption Invest In?
What qualifies as the kind of corporate event that ArbitrOption seeks for its portfolio? We apply an event-driven investment strategy that focuses on opportunities of three distinct types:
A strategic merger is a transaction in which the target company has synergies with the acquiring company that will allow the whole to be greater than the two separate parts. Synergies can be achieved through cross-selling opportunities or reduced costs from combined purchasing volume. ArbitrOption uses exchange-listed options to make investments that will be profitable if the strategic merger is completed successfully, or if the pending merger supports the stock price above a given floor while the deal is in process.
In contrast to a strategic merger, a financial acquisition occurs when the acquirer does not already have a synergistic business, but instead seeks investment returns through gaining control of the target (and, the buyer hopes, managing it better than the seller did). Financial acquirers are usually private equity firms or corporate managers taking their employer private. As with strategic mergers, ArbitrOption uses options to profit if the transaction is completed successfully, or if the pending transaction supports the target stock price while the deal is in process.
“Special situation” is another way of saying “miscellaneous,” and this is often the biggest category of event types. Special situations are pending corporate events with a predictable time frame and terminal value. Examples include buybacks and dutch tender offers, litigation outcomes, regulatory decisions, reorganizations such as spin-offs, or special dividends. In each of these examples, it is possible to use corporate guidance and previous analogous situations to forecast how long it will take for the event to be completed. It is also possible to project the potential value to be created by the event, and use options to trade into the situation at a discount to that projected value.
The Events We Don’t Invest In
In all cases, the basis for our investment is a publicly disclosed pending event that is expected to create (or, on rare occasions, destroy) value. We never invest in corporate events that are rumored or even reliably sourced but not explicitly confirmed by some management or other official communication.
We also do not invest in any opportunity that does not clearly fit one of these three categories. Even our broadest category, “special situations”, requires that any potential investment must have a forecastable terminal date and terminal value to be included.