On Aug. 6, the first broad-based merger spread widening occurred since the fall of 2011. The breakup of three announced deals that day widened spreads and provided a unique entry point to capture value through the anticipated convergence of these spreads.
Early that day the news broke that “Walgreens is staying in the U.S.” The Chicago company had chosen to keep its U.S. tax domicile after buying Swiss-based Alliance Boots GmbH, thereby forfeiting the highly controversial “inversion benefit.” Later that same day, Bloomberg reported both that Sprint Corp. and T-Mobile decided not to merge, and that Rupert Murdoch's 21st Century Fox “gave up” on bidding to acquire Time Warner Inc. The equities for the companies involved in these deals were down considerably on the news, selling off more than 10%.
Finally, Secretary of Treasury Jacob J. Lew urged Congress to act immediately to limit corporate inversion by making it a less economical option for U.S. companies. By market close, contagion had ensued in merger arbitrage, causing a broad-based spread widening that persisted for days. Many deal spreads were in the high teens by the end of the week after trading significantly tighter for several months, sometimes without regard for the nature of the deal — local or cross-border, simple or complex, short-term or long-term, with or without regulatory risks.