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. This deal resembles the Salix Pharmaceuticals deal in which Valeant Pharmaceuticals had an agreement to buy Salix under a cash tender. Endo International 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:
In the Oracle-NetSuite deal, Oracle is buying NetSuite for 10.2x its revenues. The average multiples of our comparable deals are 9.7x the revenues. The Demandware deal is a better comparable than the LinkedIn deal, but there aren’t all that many cloud deals out there to look at.
When companies are EBITDA (earnings before interest, tax, depreciation, and amortization)-negative and in emerging technologies, multiples are really a secondary concern.
Could there be a competing buyer?
Merger arbitrage resources
Other important merger spreads include the deals between Cigna (CI) and Anthem (ANTM) and between 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 interested in trading in the technology sector can look at the iShares Global Technology ETF (IXN).