Sunday, August 22, 2010

2010 Merger Arbitrage Market - A Mid-Year Update

Of course, as soon as we mention that "the merger revival that so many strategists and analysts predicted has not occurred" yet, M&A sprints off to the races. Even with the recent spurt, M&A volume in the U.S. is up only 1% YTD versus 2009, according to Dealogic. Before we highlight some of the recent announcements, it's important to note that we are not claiming that the good times have returned. A solid print for one quarter of earnings does not a trend make, especially after two years of shoddy announcements, though it allows for further momentum to build. Colleagues point out to us all the time that corporations have historically high levels of cash on their balance sheets. True, but acquisitions are not the only method of deployment for said cash. (As for the "cash on the sidelines" argument people use to portend higher equity prices, we are thankful that John Hussman is cerebral enough to elucidate the fallacy of such a statement.) Also, we're not convinced the economy is positioned for an inevitable near-term rebound, and it's entirely possible that executives at these companies aren't either. While we have a more forceful opinion on this matter, this is merger arbitrage blog, not a forum for our macro pontifications. Let's look at some situations from the last week.

IBM Corp (IBM) agreed to acquire Unica Corp (UNCA) for $480 million on August 13 to help its clients streamline and integrate key processes including relationship marketing and marketing operations. Later that day, Blackstone Group (BX) announced an agreement to acquire Dynegy Inc (DYN) for $4.7 billion. This is a transaction that has caused a bit of an uproar with the media, due to the financing structure, and we will likely cover it in the future with more detail. On August 16, Dell Inc (DELL) agreed to purchase 3PAR Inc (PAR), a global provider of highly-virtualized storage solutions with advanced data management features, for $1.15 billion. Also on Monday, Canadian buyout firm Onex Corp (OCX CN) made a proposal to buy Res-Care Inc (RSCR) for $370 million. OCX owns 24.9% of RSCR, so we probably haven't heard the end of that situation.

The big one came on August 17, when BHP Billiton Ltd’s (BHP) $40 billion proposal to acquire Potash Corp (POT) was made public. POT quickly implemented a poison pill, in case BHP planned on taking the offer directly to POT shareholders, which is precisely what happened. BHP launched a $130/share tender offer, but nothing under $145 has a chance of succeeding. This is another transaction we will cover in a later post with more detail.

Pactiv Corp (PTV) put the final touches on its auction process on August 17 when it announced that Rank Group Ltd subsidiary, Reynolds Group Holdings, would purchase the consumer and food packaging leader for $6 billion. Rank Group is a New Zealand-based company owned by Graeme Hart, an investor whose savvy use of debt has propelled him to extreme wealth (think of him as a less-hated Ira Rennert).

McAfee Inc (MFE), the security technology company, announced its agreement to be acquired by Intel Corp (INTC) on August 19. The $7.68 billion deal is INTC's first multi-billion acquisition of a public company in over 10 years. Lastly, we note the NewAlliance Bancshares (NAL) merger with First Niagara Financial Group Inc (FNFG) for $1.5 billion, also on August 19. The merger consideration is 86% in stock and 14% in cash. Again, we will provide a deeper evaluation of several of these deals in the future.

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About the Authors

Hunter is the founder of the Distressed Debt Investing Blog and the Distressed Debt Investors Club. He has worked on the buy side for the past 7 years in high yield and distressed debt investing.

Edward has been a professional investor for four years, focusing mainly on the event-driven space. His investment philosophy is value-based, and he spends the majority of his time identifying near-term catalyst based opportunities.

Email

hunter [at] distressed-debt-investing [dot] com