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Could the Lexmark Deal Get Competitive?



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. Recently, we saw a bidding war in the Starwood (HOT)-Marriott (MAR) deal.

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Purchase price was a reasonable premium

The consortium’s offer of $40.50 was a 30% premium to Lexmark’s (LXK) price on October 21, 2015—the day before the company announced that it was pursuing strategic alternatives. It was also a 17% premium to Lexmark’s stock price on April 19—the day before the deal was announced.

Lexmark ran a sales process

Lexmark characterized this deal as the culmination of a six-month process. It was announced in late October. This usually means that any potential buyer already had a chance to bid for the company. That said, Starwood ran a process and ended up with Marriott, only to see Anbang come in over the top after the deal was signed.

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Deal comparisons

Arbitrageurs often compare the price the acquirer is paying to the price of other deals in the same industry. This is always more of an art than a science. No two companies are alike and interest rate environments change. The best comparisons for this transaction include the following:

  • Domino-Brother
  • GES-Venture Corp
  • Planar-Leyard

These transactions are the closest deals to the Lexmark merger. In this transaction, the consortium is paying about 1x book value and 5.5x earnings before interest, tax, depreciation, and amortization. These multiples are lower than the comparables.

Merger arbitrage resources

Other important merger spreads include the deal between Cigna (CI) and Anthem (ANTM) 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).


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