Summary
- A bit over two weeks ago I recommended Red Hat.
- Recent news has crashed the spread.
- I think it could be a good time to move on already.
- This idea was discussed in more depth with members of my private investing community, Special Situation Report. Start your free trial today »
It is time to sell Red Hat (RHT) which is being acquired by IBM. The spread is very narrow at 0.92% implying the deal will close any day now. That's possible as The European Commission is scheduled to decide on June 27 and the deal could close shortly after. But that means when everything goes right we are making 0.92% in two weeks. That would not be a bad result at all but I'm not satisfied with that because it doesn't represent the average expected return from here on out.
Let me first quickly review what I wrote on June 5:
...However, I currently have it as closing at 9/1/2019 and the raw spread is about 2.94%.
It is one of the deals I believe has an extremely high likelihood of closing and I've put the probability at 98.5% which is significantly above average. This all culminates in an expected annualized return of 15.65%.
This seems to be mostly a function of the spread moving out slightly amid general tough markets while time has progressed and my estimated closing date approaches.
The deal is on the plain vanilla side with no obvious risks. The company even secured $20 billion in bond financing. IBM will still have a very strong investment grade credit rating after that and will suspend its large buyback program for two years to pay down debt further.
European regulatory approval is still pending but the DoJ's is in. I don't expect major trouble here either....
The share price performed very well since that time no a few pieces of news as well as the clock continuing to tick:
