Attractive Under-The-Radar Merger Arbitrage Opportunity

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By Aleksander Hansen :

This is a short write-up as the value proposition here is simple and straight forward. The opportunity is most suitable for advanced individual investors as well as smaller fund managers/RIAs due to the market cap of the target firms and the float.

During September of last year, Baylake Corp. (NASDAQ: BYLK ) and Nicolet Bankshares (NASDAQ: NCBS ) - two small Wisconsin-based community banks - agreed to combine in a merger, increasing their footprint in the area.

Under the merger agreement, each Baylake shareholder will receive 0.4517 shares of Nicolet for each share of their Baylake stock (note that Baylake will undergo a reverse split 4,517:10,000 around April 16 so that this ratio will change to 1:1 at that time).

Baylake currently trades at around $16.09, with Nicolet's shares at $38.10, resulting in a spread of $1.12, or around 7%. That might not seem like an extraordinary amount or enough to bother with, however, the transaction, when first announced, was expected to close in the first half of 2016, making this an annualized return of some 31%. Moreover, the banks have received the necessary regulatory approvals, which are typically one of the biggest hurdles in mergers, especially those pertaining to banks, or where anti-trust issues may arise. The only necessary approval remaining is shareholder approval, which we believe should be a formality. The special shareholders' meetings are scheduled for April 12th.

To make things even better, Baylake announced a special dividend of $0.40/share payable on April 25th to shareholders of record on April 18th, thus increasing the spread to $1.52/share, or 9.45%. Another nugget of information contained in the April 1st press release was an updated closing date. To quote the release, "assuming receipt of the requisite shareholder approvals and satisfaction of the remaining customary closing conditions, a closing date of April 29, 2016 is being targeted."

If the April 29 closing date is realized, the 9.45% return from shorting 0.4517 shares of Nicolet for each share of Baylake long works out to an annualized return of a whopping 200%, making this a very attractive opportunity from a risk-return point of view.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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