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-Marriott (HOT) (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, and 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:
- Dealertrack-Cox Enterprises
Salesforce is buying an emerging growth company with huge prospects, but little in terms of revenues and earnings right now. In fact, the company’s EBITDA (earnings before interest, taxes, depreciation, and amortization) is negative, and the company’s trailing-12-month revenues are only about $250 million. This puts the multiple at 11x sales, which is a sporty multiple indeed. In these cases, comparable multiples are more or less useless. The closest comparable deal is the SuccessFactors-SAP deal, which went out at 11.2x revenues. CRM is more or less paying a similar multiple.
Could a competing buyer enter?
The current trading price of Demandware stock hints that the market is pricing in at least the possibility of a competing buyer. As we’ll see in the next segment, the risk-reward ratio is horrendous, although the possibility of the deal breaking is probably minimal. Who would the competing buyers be? Most likely Oracle (ORCL) or SAP.
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).