In 2013's frenzy over ever-higher prices of speculative assets, very few investors were focused on the dollar bills lying in plain sight, waiting to be picked up at a discount. An example of this phenomenon was a classic arbitrage situation in the shares of NV Energy ("NVE"). In late May, NVE announced that it had agreed to be acquired by Berkshire Hathaway Inc. ("Berkshire") in a $5.6 billion all cash deal. While NVE shares quickly rose to just below the acquisition price of $23.75 per share, the company stated an intention to continue to pay its dividends until the acquisition closed in severa l months. At a time when cash and short-term U.S. T-Bills yielded practically nothing, NVE shares offered an almost riskless 3.1% arbitrage yield.
With Berkshire standing ready with cash in hand, the only apparent risks to this arbitrage were that Berkshire could walk away from the deal or that the deal would not be approved by government regulators. Given Berkshire's decades-long track record of seeing acquisitions through to completion and its $40 billion of available cash, we viewed the risk of them walking away as very low. We also considered regulatory approval to be extremely likely. Rather than earn 0.15% in short-term U.S. T-Bi!ls, we deployed some of the Fund's cash into NVE shares. When the acquisition closed on December 20th, we had realized a gain of 2.5%, including dividends, in just over six months, a nearly 5% return on an annualized basis. While that return pales in comparison to what the S&P 500 returned in 2013, we were pleased to have a low-risk "cash alternative" which offered a return far in excess of what was available from traditional cash instruments. We believe that the availability of such a rewarding arbitrage opportunity is an indication of many market participants ' preoccupation with high-risk, high-reward speculation in 2013. NVE was a classic non-correlated return opportunity; its return was completely independent of what the market was doing. When everyone is caught up in the exhilaration of a bull market, it can sometimes pay to take a close look at what has been overlooked and forgotten by others.