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The Informatica Merger: Elliott’s 13D Pays Off

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This deal was the case of an activist investor

Earlier this year, activist hedge fund Elliott Management took a 5% position in Informatica (INFA). The typical strategy for an activist investor is to identify an undervalued company, take a 5% position, file a 13D, and push the company to sell itself. That appears to be what has happened here.

Elliott expressed satisfaction with the result, which indicates that a process to auction the company was run. For more information on Elliott’s 13D and for a deep dive into Informatica, check out Data visionary Informatica attracts activist Elliott Management.

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Why do private equity firms do deals?

So far, it appears that none of the firms in the consortium own a health club, which makes antitrust analysis easy. Yet, this means there are no synergies to extract, either. As a general rule, private equity firms take over stocks because multiples are depressed or they think they can wring out efficiencies from the company by operating it better or cutting costs.

As a general rule, private equity firms look to take out a company, use leverage to extract equity, improve the business, and then sell it at a higher exit multiple than what they paid for it. It’s an internal rate of return play. In fact, that’s how you construct a basic LBO (leveraged buyout) model.

In the case of Informatica, you have a company with a 4.7% free cash flow yield and no debt. The consortium can lever that yield with debt and reap a decent return on investment while they use their expertise to help grow and manage the company.

Merger arbitrage resources

Other important merger spreads include the deal between Baker Hughes (BHI) and Halliburton (HAL) or the merger between Pharmacyclics (PCYC) and AbbVie (ABBV). For a primer on risk arbitrage investing, please read Merger arbitrage must-knows: A key guide for investors.

Investors who are interested in trading in the tech sector should look at the S&P SPDR Tech ETF (XLK).

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