Could the Apollo-ADT Transaction Get Competitive?

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.

The $42 purchase price was a high premium of over 50% to where ADT (ADT) was trading on February 12, 2016, the Friday before the deal was announced. This shows that Apollo (APO) was highly motivated to make the deal. It is obvious there was no sale process run given the go-shop provision.

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. The best comparisons for this transaction include the following:

• Securitas and AB Latour
• Niscayah and Black and Decker
• Garda and Apax

These transactions are the closest deals to the ADT-Apollo merger. That said, some of these companies had different growth rates, and occurred a while ago, so making comparisons is difficult. In particular, ADT was viewed as something of a turnaround candidate and had been an underperformer for several years.

In this transaction, APO is paying about 3.4x revenues and 7x EBITDA (earnings before interest, tax, depreciation, and amortization). The revenue multiple is a little higher than the average revenue multiple for the comparable transactions (3.4x versus 1.7x) and lower than the comparable EBITDA multiples (7x versus 12.6x). The comparable multiples had a pretty wide dispersion, so take them with a grain of salt. Regardless, ADT has ample opportunity to solicit other bids.

Other important merger spreads include the deal between Baker Hughes (BHI) and Halliburton (HAL) and KLA-Tencor (KLAC) and Lam Research (LRCX). For a primer on risk arbitrage investing, read Merger Arbitrage Must-Knows: A Key Guide for Investors.

Investors who are interested in trading in the tech sector can look at the iShares Global Technology ETF (IXN).