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 exactly alike and interest rate environments change. The best comparisons for this transaction include the following:
- Freescale Semiconductor-NXPI
In this case, Softbank is paying a pretty penny for ARM Holdings (ARMH). The premium to the prevailing share price was in the low 40%. In terms of valuation, Softbank is paying 22x revenues and 50x trailing EBITDA (earnings before interest, tax, depreciation, and amortization). These are much higher multiples than you see in a typical semiconductor deal. The comps here went out at about 5.5x revenues and 20x EBITDA. That said, ARM Holdings is a special asset. It could command a premium multiple.
Could there be a competing buyer?
We won’t really find out much about the background of the deal until the scheme document is released. ARM Holdings doesn’t appear to have been for sale, so it’s doubtful it ran a sale process. It looks like Softbank approached and they inked a deal.
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).