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Could the Oracle-NetSuite Deal Get Competitive?


Aug. 4 2016, Updated 10:58 a.m. ET

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.

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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:

  • Demandware–Salesforce.com
  • LinkedIn–Microsoft

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?

Oracle (ORCL) co-founder Larry Ellison and his family already control 45% of NetSuite (N) stock. So while it’s theoretically possible that a company could make a hostile bid for NetSuite, most companies would find this voting block too daunting.

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).


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