2 Arbitrage Ideas From Warren Buffett and Seth Klarman

The Monsanto and Syngenta buyouts offer attractive returns

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Ryan Vanzo
Feb 23, 2017
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It does not seem as if legendary value investor

Seth Klarman (Trades, Portfolio), founder of the Baupost Group, is very confident about the seemingly incessant rise in U.S. stock markets. That puts him at odds with Warren Buffett (Trades, Portfolio), who seems as confident as ever in American markets.

In his recent letter, Klarman notes the markets are currently at "perilously high valuations." Driving these valuations were "exuberant investors" who have "focused on the potential benefits of stimulative tax cuts, while mostly ignoring the risks from America-first protectionism and the erection of new trade barriers." He believes the current political climate may "drive government deficits considerably higher," potentially proving quite inflationary, which would likely shock investors.

Buffett has taken the opposite approach, deploying over $30 billion since the presidential election. Investments include roughly 43 million shares of Southwest Airlines (

LUV, Financial) and just over 57 million shares of Apple (AAPL, Financial).

While the two seemingly disagree over their current abilities to find ample value in the market, they both seem to have found opportunities in a niche corner of the market: agricultural merger arbitrage.


As of his latest filing, Klarman's Baupost Group shows a new purchase of Syngenta (

SYT, Financial). He is not alone. Legendary investors Jeremy Grantham (Trades, Portfolio), David Einhorn (Trades, Portfolio) and Paul Tudor Jones (Trades, Portfolio) have also joined the fray, all buying stock between $75 and $88 a share.

It is compelling to follow the leader. Here are the facts:

  • China National Chemical Corp. (ChemChina) is a Chinese state-owned company that, early last year, offered to buy Switzerland-based Syngenta, which produces crop seeds, pesticides and herbicides.
  • The deal is valued at $93 a share (a bit more when you consider the special dividends). That represents about 10% upside to current prices.
  • "entirely confident" Erik Fyrwald, Syngenta chief executive, told CNBC Wednesday.

    Fyrwald confirmed that the deal had already received basic approvals in the U.S. and is on track to close in the second quarter of 2017.

    "entirely confident" Erik Fyrwald, Syngenta chief executive, told CNBC Wednesday.

    Fyrwald confirmed that the deal had already received basic approvals in the U.S. and is on track to close in the second quarter of 2017.

    On Feb. 7, Syngenta's CEO said he is "entirely confident" the deal will go through.
  • He also confirmed the deal had already received basic approvals in the U.S. and is on track to close in the second quarter of 2017.

If the deal does indeed close in the second quarter of 2017, the arbitrage opportunity would represent more than 30% annualized gain. Especially with overheated markets, this appears like a bet worth taking for Klarman.


Buffett is attempting to capitalize on merger arbitrage opportunities in the agriculture sector by buying shares of Monsanto (

MON, Financial). Several other hedge fund managers have joined the fray, but unlike with Syngenta, it looks likes many managers have taken the bearish view, trimming or selling out of their positions last quarter.

Here are the facts:

  • In September of 2016, Bayer (BAYRY, Financial) agreed to buy Monsanto for $128 per share, a total consideration of $66 billion including debt.
  • This deal will not close until the end of 2017 (hopefully).
  • Despite delays, Bayer "remains confident about completing its $66 billion takeover...by the end of the year."
  • The drugmaker will "seek EU approval for the transaction in Q2 after regulators there requested more information."
  • At the current price of $111 a share, this represents roughly 15% upside (and a similar annualized return based on a 12-month completion date).

Which deal is better?

According to Bloomberg BNA, megadeals with a value greater than $10 billion have a failure risk of 28%, more than twice the failures of the next tier. With market caps of $40 billion to $50 billion, not to mention contentious political and regulatory scrutiny, Monsanto and Syngenta face a tough road ahead.

Between the two, however, most analysts expect Syngenta to have the highest odds of success because it will result in the least consolidation and concentration. In terms of regulatory hurdles, there were concerns whether or not the acquisition would be approved by the Committee on Foreign Investment in the U.S. That approval was received in August. The last major hurdle appeared to be the European Commission. On Feb. 2, the EU cleared the merger if ChemChina agreed to sell certain product lines.

Meanwhile, the Monsanto-Bayer merger has not even been filed with EU regulators, with unknown asset deals certainly set to be included in the questions.

An easier regulatory pathway combined with an anticipated completion date of the second quarter and recent optimistic remarks from its CEO make Syngenta an attractive choice over Monsanto. With a calculated over 30% annualized gain, it could be one of the best deals on the market. Klarman seems to think so.

Disclosure: I have no positions in any of the stocks mentioned above and no intention to initiate a position in the next 72 hours.

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Ryan has been covering public equities for more than a decade. He has worked on the investment research teams for several multi-billion dollar hedge funds in San Francisco and New York.