One of the strategies on Wall Street that sounds mysterious to investors but really is, in many cases, a reasonably safe way to secure return, is called merger arbitrage. While it sounds very exotic, at the core it is an educated guess that a deal that has been announced and is in the process of being completed indeed gets done.

Typically hedge funds and other investors that deal in this strategy will buy the stock of a company being bought, and then simultaneously sell short the stock of the acquiring company to create a riskless profit. Because of this slight uncertainty, the target company’s stock will typically sell at a discount to the price that the combined company will have when the merger is closed. This discrepancy is the arbitrageur’s profit.

For anyone who doesn’t want to deal with the selling short part, the idea would be just to buy the stock of the company being acquired because of the discount to the acquisition price and the good probability that the deal does indeed get done.

The Jefferies analysts feel that four of the current deals look solid, and owning the company being acquired may be a good move for investors who have a higher risk tolerance.

Baxalta

This company was spun off from Baxter International in 2015 and is one of the Jefferies high-conviction long trades. Baxalta Inc. (NYSE: BXLT) is a global biopharmaceutical leader developing, manufacturing and commercializing therapies for orphan diseases and underserved conditions in hematology, immunology and oncology.

Baxalta’s broad and diverse pipeline includes biologics with novel mechanisms and advanced technology platforms such as gene therapy. Baxalta’s heritage in biopharmaceuticals spans decades. Its therapies are available in more than 100 countries, and it has advanced biological manufacturing operations across 12 facilities, including state-of-the-art recombinant production and plasma fractionation.

Shire finally concluded a six-month pursuit of the company in January when the two companies agreed to a $32 billion buyout, which some say will create the world’s biggest rare-disease drugmaker. Shire agreed to pay $18 in cash plus 0.1482 of its American depositary shares for each Baxalta share, making this one of the few ever cash-and-stock deals involving a recent tax-free spinoff. The deal terms imply a valuation of approximately $47.50 per share for Baxalta shareholders. There are tax inversion issues that may cloud the sale and should be considered.

Baxalta shareholders receive a small 0.72% dividend. The Thomson/First Call consensus price target is $46. The shares closed Wednesday at $38.98.

EMC

This company is flat out cheap, trading a five times enterprise value to EBITDA, and is being taken private in a deal with Dell. EMC Corp. (NYSE: EMC) is technology’s large-scale storage leader, but new avenues of flash and other storage opportunities are grinding away at the tech giant’s business. The good news for the company is that storage demands are accelerating.

The company’s majority ownership of VMware gives it a virtualization infrastructure solutions product, which includes a suite of products designed to deliver a software-defined data center, run on industry-standard desktop computers and servers. Wall Street was very positive on the platform-as-a-service opportunity and believes EMC’s Pivotal could grow to be a significant business.

Dell is buying the storage giant for a stunning $67 billion, which will make it the largest deal in tech history when completed. The computer maker plans to pay $24.05 a share in cash plus tracking stock VMware, valued at about $9 for each EMC share. This is another one of the Jefferies high-conviction long ideas.

EMC shareholders receive a 1.8% dividend. The consensus price target is $28.52. Shares closed Wednesday at $25.43.
ITC

This electric transmission company confirmed late last year it was considering a possible sale after Bloomberg named National Grid and Iberdrola as potential buyers. ITC Holdings Corp. (NYSE: ITC) functions as a conduit, allowing for power from generators to be transmitted to local distribution systems through its own systems or in conjunction with neighboring transmission systems. It owns and operates high-voltage transmission facilities in portions of Michigan, Iowa, Minnesota, Illinois, Missouri, Kansas and Oklahoma.

According to Wall Street analysts, the company could sell for as high as $45 per share, and it is unlikely that there would be regulatory issues that would prohibit a transaction. That can always change, depending on who the buyer turns out to be. This is far more speculative for investors as no deal actually has been announced, and there is always the possibility that the company does not find any buyers willing to pay the price sought.

ITC shareholders receive a 1.84% dividend. The consensus price target is $41.75. The stock closed most recently at $40.68.

SanDisk

This is another top chip company that many have felt will be a winner in the storage migration. SanDisk Corp. (NASDAQ: SNDK) is a global leader in flash storage solutions. For more than 27 years, SanDisk has expanded the possibilities of storage, providing trusted and innovative products that have transformed the electronics industry. Today, SanDisk’s quality, state-of-the-art solutions are at the heart of many of the world’s largest data centers and embedded in advanced smartphones, tablets and PCs.

Western Digital had put together a deal back in October to buy the company for $19 billion. It was announced this week that China’s Unisplendour had scrapped its planned $3.78 billion investment in the company, a move that in turn alters the terms of Western’s deal for the company. Reportedly the company will now present an alternative offer for SanDisk consisting of more Western Digital stock and less cash, giving the deal an overall value of $15.78 billion. The value of the deal for SanDisk is now $78.50 per share, down from $86.50 when it was originally struck, according to Sumit Sadana, a SanDisk executive vice president.

Again, this wrinkle in the deal makes things a little more dicey, and should be monitored closely.

The consensus price target is $78.16, and shares closed on Wednesday at $69.90.

While the potential for all these deals looks solid, it should be noted there is no firm guarantee that any of them get done in their current form, or perhaps at all. Buying any of these stocks is only for extremely aggressive accounts that can tolerate big moves in capital. With that in mind, the discounts to the target pricing are solid and make sense for risk-tolerant investors.

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