• Spreads of major deals such as AMD's purchase of Xilinx and Analog Devices acquisition of Maxim Integrated narrowed after hitting some of widest ever yesterday since the deals were announced.
• “I’ve never seen anything like it," Roy Behren, managing member and portfolio manager at Westchester Capital, said in an interview with Seeking Alpha last night. "Maybe in March of 2020 with the COVID, other than that, you can tell people are just selling out of positions."
• Behren is referring to last March when deal spreads severely widened during Covid when investors thought the pandemic could derail LVMH's purchase of Tiffany and AbbVie's acquisition of Allergan.
• The Xilinx/AMD deal spread widened to about $65/share yesterday, or about 45%, though today it has narrowed to about $44, or 29%. AMD fell 5.4% today, while Xilinx climbed 4.4%. Spreads of deals that need Chinese approval yesterday widened as investors appeared to be de-risking on general concerns about China as well as U.S. antitrust deal risk.
• "The spreads in, for example, Xilinx and Maxim Integrated and Coherent deals have gone to ridiculously wide levels," Behren said in a phone interview. "It's not just risk off, it's people blowing out at whatever cost. I've got more red on my screen than I've ever seen in a long time."
• Behren attributes the recent widening in deal spreads to Aon PLC and Willis Towers Watson PLC's decision to terminate their deal last week,which caught risk arb investors by surprise.
• "As Willis Towers caused larger losses than almost everybody anticipated, it set off a cascade of risk reduction in event driven and arbitrage investors, which fed on itself," Behren said.
• Behren said he believes that there are number of spreads that are "completely inefficiently priced" and wider than they should be. For example, if you look at Xilinx (XLNX)/AMD and believe that China may block the deal, Xilinx (XLNX) was trading yesterday as if there was no downside left.
• China is "very opaque, it's unpredictable and the level of execution risk has gone up significantly," Behren said.
• That being said, he added, "there should not be a legitimate antitrust reason for blocking this deal."
• Earlier,China unlikely to clear deals in August as antitrust officials take vacations.