Having Fun with Special Situations
Taking a look at a few special situations: BECN, IGMS, BOID, ALGM
This year I have been trying to lean more into merger arbitrage and spinoffs. So far I have bought two stocks that are getting acquired, plus a potential liquidation. In this weeks post, I wanted to give an update on the special situation stocks I own, plus present a potential merger arbitrage that I am not invested in yet.
Beacon Roofing Supply
QXO is acquiring the building materials supplier Beacon Roofing Supply (BECN) for $124.35 per share. The deal has been somewhat dramatic, as QXO initially offered to buy Beacon for $124.25 a share in November, but the company rejected the offer, claiming it undervalued the business. In response, QXO's CEO, Brad Jacobs, launched a tender offer, prompting Beacon to implement a poison pill defense. Before the initial offer, BECN was trading in the mid $90 range. After the November announcement, the stock price rose to $113, but then drifted back down to $100. Ultimately, Beacon accepted a slightly higher offer, just ten cents more per share. Now the stock has closed most of the gap to the deal price.
I purchased shares after QXO's initial $124.25 offer, but before Beacon had accepted it. I currently own 30 shares with an average purchase price of $118. Given my cost basis, if the deal did not go through I might have lost about 20%. Now that the deal has been finalized, Beacon's stock has rallied to $123.84, putting me up about 5% based on my cost basis. Based on this estimated gain/loss at the time of my purchase, the the market was suggesting odds of 78% that the deal would go through. I thought the situation had a reasonable deal spread, seemed like Brad Jacobs was determined to make a deal, and Beacon did not seem opposed to selling out, they just wanted a higher price. After having held the stock for nearly two months, I ended up with a solid annualized return.
IMG Biosciences
IGM Biosciences (IGMS) marks my first foray into investing in a biotech company that I believe is on track for liquidation. The company suspended its drug research efforts, which led to the stock price plummeting by 80%, bringing it to its current level. As of the end of 2024, IGM had $183 million in cash and short-term investments, but in an effort to reduce cash burn, the company laid off 73% of its workforce. My investment thesis was based on the idea that IGM wouldn't deplete too much of its cash balance and would ultimately liquidate for a modest gain. However, this was somewhat speculative, as I had to estimate their cash burn.
To make matters more frustrating, I purchased my shares at an average cost of $1.67, only to see the stock drop further to $1.20. At my cost basis, the market cap was $97 million. In 2024, the company spent $160 million on R&D, but I assume that will drop to zero, with SG&A expenses of $50 million also expected to decrease, though severance costs will impact this. I’m hoping IGM provides some updates on their restructuring soon, as their balance sheet is currently a mystery.
Bank of Idaho Holding Company
Bank of Idaho is being acquired by Glacier Bancorp in a stock deal where BOID shareholders will receive 1.1 shares of GBCI per share owned. The deal was announced on January 13th and is expected to close in the second quarter of 2025. One common strategy for all-stock mergers is to go long on the company being acquired while shorting the acquirer, effectively locking in the deal spread as the acquirer’s stock fluctuates.
This is my first time shorting a stock, making it a learning experience. I purchased BOID shares at $50.75 and shorted GBCI at $50.50, securing a 9.5% spread. Prior to the deal being announced, BOID was trading for about $34 a share. This produces a potential loss of 33% and implied odds of 78% that the deal goes through. There didn’t appear to be any reason for the deal to not go through. The likely reason for this wide spread is BOID’s illiquidity, it took me a few days to build even a small position. Hopefully, this arbitrage trade works out, as I believe small bank consolidations will continue, making this an area worth focusing on.
Allegro MicroSystems
I don’t currently have a position in this trade, but I thought it would be interesting to discuss. ON Semiconductor has made an unsolicited bid to acquire Allegro Microsystems for $35.10 per share, but Allegro rejected the offer as inadequate. Despite this, the company didn’t outright shut down the possibility of a deal. Right now, ALGM is trading around $26, creating a 35% deal spread. Allegro’s stock price has bounced around the mid $20 range for the past few months, and the stock has not dramatically responded to the announced offer.
This arbitrage play seems speculative since Allegro has not accepted any offer, but ON may see an opportunity to acquire the company at a discount due to industry conditions. Nearly 75% of Allegro’s revenue comes from the automotive sector, which has been weak recently, leading to a 30% decline in sales compared to last year. ON likely views this as a chance to buy Allegro while the industry is in a downturn.
Allegro typically trades at a higher earnings multiple than what I usually look for, but the company invests heavily in R&D and has been growing its sales. Over the past several years, ALGM’s revenue has surged due to the increasing adoption of electric vehicles, for which they manufacture semiconductors. While I wouldn’t buy Allegro purely based on its fundamentals, it doesn’t seem like a struggling business, making it a reasonable candidate for a merger arbitrage play. I don’t own any shares yet, but it’s tempting to take a small position in case a deal eventually materializes.
really enjoy these, thanks for sharing. Have you looked at Phinia (PHIN) or Superior Industries (SUP) ?