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Could the SanDisk-Western Digital Merger Get Competitive?

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Competitive deals can make your quarter

Competitive deals can make your quarter if you’re a merger arbitrage professional. If you get two companies bidding against each other, a 1% gross spread can easily become a 10% gross spread by the time everything is said and done. We saw that happen in the Salix Pharmaceuticals deal.

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Could a competitor break up the SanDisk-Western Digital merger?

We don’t know if SanDisk (SNDK) ran a process to sell the company. Companies typically refer to the sale process as “examining strategic alternatives.” Usually you don’t get any definitive answers until the preliminary proxy statement comes out. As part of the preliminary proxy statement, there’s always a section regarding the background to the merger. That’s where you find out if the seller ran a process. If the seller did run a process, then it is unlikely another buyer will emerge. Note that since this deal appears to have some antitrust issues, a potential buyer may prefer to wait and see how the regulatory process plays out before making a move.

Deal comparisons

Arbitrageurs often compare the price the acquirer is paying to the prices of other deals in the same industry. This is always more art than science, since no two companies are alike and interest rate environments change.

Comparative transactions in the technology sector should be treated with caution. Tech companies can command massive multiples when their technology is emerging and then low multiples when their technology is mature. For this reason, it is best to take deal multiples with a grain of salt. That said, here are some recent deals in the semiconductor space:

  • PMC Sierra-Microsemi
  • KLA-Tencor-Lam Research
  • Broadcom-Avago Technologies
  • Freescale Semiconductor-NXP Semiconductors
  • Altera-Intel

These transactions are about the closest comparisons we have to the merger between SanDisk (SNDK) and Western Digital (WDC).

In this transaction, Western Digital is paying about 2.6x trailing-12-month revenues and 10.6x trailing-12-month EBITDA (earnings before interest, tax, depreciation, and amortization). These multiples are below the averages in the other transactions, which work out to be about 4.4x revenues and 23x EBITDA. Since every company is different and in a different phase in the technology cycle, it’s difficult to draw many conclusions. However, we can see that (a) WDC is not overpaying and (b) SNDK was trading a lot higher earlier in the year.

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