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Ryland and Standard Pacific Join in a Merger of Equals

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Merger arbitrage

To perform merger arbitrage, an investor will generally buy the stock of the company being acquired, sell short the relevant ratio of the acquirer’s stock, if applicable, and wait for the deal to close. When the merger is completed, the investor will exchange the stock of the company being acquired for the deal consideration.

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Merger of equals

Ryland (RYL) and Standard Pacific (SPF) are two California-based homebuilders. Today, they announced their merger of equals transaction in order to gain scale and capture synergies. Merger of equals transactions are different than traditional mergers. Neither company is considered the buyer and seller. These sort of deals are usually done in order to keep both companies’ management. As a general rule, these transactions don’t include a merger premium on either side. That’s the case here.

As a result, there really isn’t much of an arbitrage spread to take advantage of here. Ryland is trading at a 1% premium to deal. This reflects the lack of a material downside in the stock because there wasn’t a premium paid in the first place. The lack of a control premium also makes it easier for a competing buyer to top Standard Pacific’s bid.

Timing is right for the sector

On the conference call, management discussed how this was the right time in the cycle to merge. In fact, they were more worried about being too late than too early. In the mid to late 1990s, we saw a similar spate of mergers just as the sector was recovering from the housing recession in the early 1990s. On the call, management stated that they see another wave of consolidation hitting the industry.

The combined company will have a presence in 17 states. It will have 26 divisions serving 41 major markets. It combines Standard Pacific’s long-standing California foothold with Ryland’s Midwest and East Coast strength. The companies plan on doing a major push into the East Coast markets.

This deal is about scale, synergies, and diversification.

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