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. In fact, this deal also resembles the Salix Pharma deal where Valeant had an agreement to buy Salix under a cash tender. Endo Pharmaceuticals lobbed in a competing bid. Valeant ended up having to increase its offer to get the deal done. Arbitrageurs made about 10% gross in the course of a few weeks.
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:
- HLTH Corp-WebMD
In all honesty, these are imperfect comps. They aren’t social networking sites—they’re simply content websites. Unfortunately, the big deals in the social media space have been private—WhatsApp and Facebook (FB), Facebook and Instagram, and Google and YouTube. While these deals had high prices (WhatsApp was a $19 billion deal), there weren’t enough earnings to really calculate financial metrics. For this deal, you should throw the comps out the window because they’re useless.
Could there be a competing buyer?
Microsoft paid a 50% premium to LinkedIn’s June 10 closing price. At 7.5x revenues and 75x earnings before interest, tax, depreciation, and amortization, Microsoft is paying a lot. That said, LinkedIn is a unique property. Other potential buyers like Google, Facebook, or Apple might want to purchase LinkedIn. It doesn’t appear that LinkedIn ran any sort of sale process. However, it has been fighting slowing revenue growth.
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).