Tuesday, May 23, 2017 0 comments ++[ CLICK TO COMMENT ]++

Sold: Syngenta (SYT) -- Tender Offer Accepted

The Syngenta (SYT) buyout successfully closed about a week ago and ChemChina cashed out all shareholders that tendered the shares near the end of last week. If you haven't tendered your shares, you should do so immediately in the next round where they are accepting the shares; who knows how the untendered shares will be treated once the offer ends and you don't want to be in that situation (this is a Swiss company and is an ADR so squeeze-out rules may not be what a typical American or Canadian investor encounters).

Overall, I'm very satisfied with this deal. The returns weren't that great--about 10% from the initial October 2016 position and about 3.6% from the April 2017 position--and the deal got delayed by about a quarter for regulatory reasons but it was a low-risk position and turned out as I was anticipating. This is the kind of risk arbitrage position I would like to take on.

You learn a lot from deals like these. You don't get to see it reading this blog but I was starting to question myself because the spread was so large for so long. For such a publicly visible deal, it is easy to doubt yourself when the spread stays somewhat wide. The question, 'what does the smart money know that you don't' runs through your head a lot. In fact, I still can't figure out why the spread remained at about 3% even after the European regulators, who were the main gatekeepers, approved the deal. That's when I decided to significantly increase my stake (it almost seemed like a risk-free arbitrage at that point). I would have put more money into this deal at that point but it was a bit risky in terms of currency fluctuations (I only have a small portion in US$ and I don't hedge so even though 3% seemed almost risk-free, it could be wiped out by currency changes). Also, it would be in a taxable account so the benefit is diminished.

You also learn something about position sizing in deals like this. I was always thinking about increasing the stake but was a bit too scared. Then after the regulator approved, my confidence increased and I put as much money as I can into this (keeping in mind what I mentioned above: currency risk and tax impact). My portfolio isn't large like some of you but I had around 56% of my portfolio in Syngenta by the end.

I can never be sure but I think the spread remained large because this deal is too big for risk arbitrageurs. Professional risk arbitrageurs tend to have 20+ deals at the same time and don't take big positions unlike amateurs like me (a key reason for this is that you want risk arbitrage to be uncorrelated to the market and not so dependent on company specific risk). This is a massive deal and arbitrageurs likely didn't have enough capital to commit. Furthermore, there were some big blow-ups, including John Paulson's risk arbitrage funds, in 2016 due to big merger failures (particularly several big deals being blocked by regulators in the healthcare sector). I think this limited the capital availability and probably made them limit their exposure to individual deals.


Price sold: US$92.95
Total Return: 6.4% (annualized (estimate): 11% -- not meaningful)


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Sunday Spectacle CCXXVII

Real Estate Contribution to Canadian Provincial GDP




(source: "In Home Capital’s Mortgage Mess, Blame the ‘Unlucky’ Brokers" by Katia Dmitrieva, Bloomberg, May 23 2017)

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Sunday Spectacle CCXXVI

Rise of Indexes vs Stocks

Not sure what is counted as stocks in this graphic by Bloomberg but it's amazing that indexes outnumber stocks. That's beyond crazy. The number one function of stock markets, according to some theorists, is price discovery and wonder how much of that is lost due to the rise of indexes.

Wonder how these indexes are going to behave during a market correction or a crash.


source: "There Are Now More Indexes Than Stocks," Bloomberg, May 12 2017

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Sunday Spectacle CCXXV

American Business Creation/Termination

I'm shocked to see such a low number of businesses (overall net) being created in the last decade. I don't know if the data is bad or something is being missed. This is probably good for existing companies but bad for society (since it implies less dynamic and less innovative economy).


(source: 1Q 2017 GMO Quarterly Letter, GMO. URL direct link; URL main website)

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