Yesterday the merger of Willbros Group with Primoris Services was successfully completed. When I wrote about the merger I thought that there was little that could derail the deal, and that it would close fast, and that proved to be the case. Making a 9.1% return in two months time is as good as it gets in the merger arbitrage game.
However, just because that this deal was completed successfully doesn’t really mean that it was a good bet. I think it was, but last week I got a not so nice reminder that deals with companies that aren’t in the best financial position (like Willbros) can quickly get very ugly when things don’t go as planned. I had a position in Rosetta Genomics, a company that was flirting with bankruptcy as well before Genoptix agreed to take it over. After it (finally) managed to secure shareholder approval for the deal I thought that there was also little that could derail it, until Genoptix claimed the existence of a “Material Adverse Effect” (no details were given).
The stock has cratered since that announcement because it’s unlikely that there will be anything left for equity holders in a bankruptcy scenario. Looking back at it in hindsight I don’t think I made an error in betting on this merger, but the unfortunate reality is that there is always a small possibility of a deal failing for some unexpected reason. As long as you size your positions accordingly it shouldn’t be a problem, although it’s of course never going to be nice…
Long Willbros Group (since the cash payment hasn’t been received yet by my broker)
Appreciate your openness about this AV. And thank you for the Willbros idea! (Which I did size very modestly)
Provlems in such cases – when u succeed its 9% and when it fails its -50%
Do you have Genworth Financial/China Oceanwide on your radar?
Seems derisked now that CFIUS approved the deal.
Sure, it has derisked, but the spread has gone down a huge amount as well. No idea if it’s now more or less attractive than before. In general I try to keep out of these kind of deals because I don’t know how to handicap these kind of regulatory and political risks…
How do you size your portfolio? For instance for a 25,000 USD maybe 10-20 percent of the total account?