Friday, September 10, 2010
Sunday, August 22, 2010
Monday, August 16, 2010
Thursday, July 22, 2010
Wednesday, June 30, 2010
On June 16, 2010, the board of directors of SonicWALL, Inc. received an unsolicited non-binding proposal from Strategic Party D, a privately held competitor, in which such party proposed, subject to completion of due diligence and finalization of definitive documentation, to acquire the outstanding shares of common stock of SonicWALL for $12.00 per share in cash. Strategic Party D’s offer identifies Financial Sponsor C and Financial Sponsor D as expected equity financing sources for its proposal and states that it is in discussions with debt financing sources.On June 18, 2010, the board of directors of SonicWALL, after consultation with its financial and legal advisors, determined that the unsolicited non-binding proposal from Strategic Party D meets the criteria required by Section 5.6(b) of the Merger Agreement to permit the Company to provide information to, and negotiate with, Strategic Party D in accordance with its terms. Based on this determination and as permitted by the Merger Agreement, SonicWALL delivered a confidentiality agreement with a standstill provision to Strategic Party D and its proposed equity financing sources as provided for in the Merger Agreement and, upon its execution, will furnish information to Strategic Party D and enter into discussions with it regarding its proposal.The board of directors of SonicWALL has not approved, adopted or recommended the acquisition proposal from Strategic Party D or declared it superior to the Merger Agreement and the merger. Moreover, SonicWALL’s board of directors has not withdrawn, qualified, or modified its recommendation that SonicWALL shareholders approve the principal terms of the Merger Agreement, the merger and the Agreement of Merger. Our board of directors continues to recommend that you vote “FOR” the proposal to approve the principal terms of the Merger Agreement, the merger and the Agreement of Merger. There is no assurance that negotiations with Strategic Party D will ultimately lead to a superior proposal, that SonicWALL and Strategic Party D will reach final agreement on terms regarding the acquisition of SonicWALL by Strategic Party D or that, if the parties do enter into such an agreement, regulatory approvals and other conditions to completing such a transaction will be obtained.
Tuesday, June 22, 2010
Monday, June 14, 2010
Javelin believes that, in asserting the failure to satisfy in full any such conditions, Hospira is purporting to rely on information regarding a supply chain issue in the United Kingdom described below.Javelin was notified, on May 14, 2010 by a licensee of commercial rights to Dyloject in the European Union, that an issue has arisen in the UK Dyloject supply chain. Javelin notified Hospira of this matter promptly after being informed. Javelin is not aware of any issue in its supply chain for Dyloject in the United States.Javelin disagrees with Hospira's position under the merger agreement that the conditions to the tender offer have not been fully satisfied and believes that all of the conditions of the tender offer have been satisfied. Javelin continues to honor its obligations under the terms of the merger agreement.
Therabel Pharma UK Limited ("Therabel"), a subsidiary of Therabel Pharma N.V. and Javelin's licensee of commercial rights to Dyloject™ (diclofenac sodium) in the European Union recently informed Javelin and publicly announced that it is withdrawing all batches of Dyloject (diclofenac 75mg/2ml) from the UK market with a Drug Alert Class 2 Medicines Recall.Therabel reported that it became aware of the presence of a white particulate matter in some vials of Dyloject in its supply chain. These findings were promptly reported to The Defective Medicines Reporting Centre (DMRC) of The Medicines and Healthcare Products Regulatory Agency (MHRA) in accordance with standard procedures.Therabel further reported that its review of pharmacovigilance information does not appear to indicate any detected patient safety concerns linked to the particulate matter found in some vials. Dyloject has been marketed in the UK since December of 2007.Therabel has indicated that it is cooperating fully with the MHRA and is active in an investigation to resolve this matter and to restore the supply of Dyloject to the UK market as soon as possible. Javelin is providing assistance to Therabel with its investigation.
Monday, May 10, 2010
Monday, May 3, 2010
Sunday, April 11, 2010
Saturday, April 10, 2010
Sunday, April 4, 2010
Not all acquisitions are negotiated in a friendly manner. Companies often become targets when they are weak, be it a depressed share price, or a troubling business environment. Management is always reluctant to relinquish control during these times. We all want to leave while on top, right? When a company receives an unsolicited takeover offer, it has several possible defense mechanisms. Defensive by-law provisions are designed to create structural impediments for acquirers, thereby allowing the incumbents to maintain control. We will highlight various takeover defenses companies use to thwart interested parties.
If a hostile offer is rejected by a target company’s board, the bidder will often seek to replace said board with its own nominees. To do this, the bidder will have to gain majority representation and vote to accept the proposal. To prevent this, the target can adopt a classified board, also called a staggered board. Assume a board is composed of nine directors, each serving three year terms. Further imagine that a takeover proposal is initially rejected in unanimous fashion (maybe the valuation is unacceptable, or perhaps the board is replete with friends of the CEO who don’t want to see their buddy out of a job when the new sheriff arrives). In a standard board, the bidder can elect its nominees, and if the sufficient number of shareholder votes is secured, then board control is realized. In a staggered board, a nine-member board will likely have three directors up for election each year. So, to gain control, it will take a minimum of two shareholder votes (often annual meetings) to hold the required number of board votes. This can be a lengthy and expensive process. What can also happen is that the target’s share price can drift to the offer price on a fundamental basis, which diminishes the bidder’s argument that it is offering a substantial premium.
Another tool commonly used is the shareholder rights plan, which is also called a poison pill. Recall that Carl Icahn is seeking legal proceedings to remove Lions Gate’s poison pill. The idea of a rights plan is that the board adopts a threshold above which the people who do not cross are allowed to purchase shares at a discount to dilute the triggering party. The longer-term trend shows that poison pills have been on the decline. In 2001, 60% of S&P 500 companies had pills in place, sharply higher than the 21% in 2009.
Let’s look at an example of how a pill has a dilutive effect. A company with a $10 stable stock price has a shareholder rights plan with a 20% threshold and a $40 exercise price. An investor hits the 20% mark, thereby triggering the “flip-in” feature of the plan. Each shareholder, except the triggering party, has the right to buy eight shares for $5 each (the right is to buy, for the exercise price, the number of shares equal to the exercise price divided by 50% of the 30-day average price). Let’s say there are 100 shares total, so the non-triggering parties own 80 shares, and have the right to buy 640 shares for $3,200. The triggering party would see his or her position go from 20% of a $1,000 company, a $200 interest, to owning 2.7% of a company worth $4,200, a $113 interest. The math goes from 20/100 to 20/740. This is assuming maximum dilution, and that each non-triggering shareholder exercises all the available rights.
The vast majority of companies are incorporated in Delaware. Since a board of directors must approve a merger, Delaware has the “just say no” defense, meaning that the board can reject an offer indefinitely. The remedy to this is to replace the board, and the aforementioned staggered board can prolong this process. Of course, if a compelling enough offer is continually ignored, then the directors will ensure their own ouster.
These are strategies that merger arbitrage investors keep in mind in unfriendly transactions. They will undoubtedly come up in future situations we will analyze
Monday, March 15, 2010
Thursday, March 4, 2010
Wednesday, February 24, 2010
Sunday, February 21, 2010
Here at Merger Arbitrage Investing, we will cover a number of books related to risk and merger arbitrage. Our first book, "Risk Arbitrage: An Investor's Guide" will be discussed over the next few months, in tandem with other topical posts related to current deals in the market as well as case studies. The goal is to teach the reader, the in's and out's of merger arbitrage and to equip an investor with another tool in his arsenal.
Monday, February 8, 2010
Sunday, January 31, 2010
Monday, January 18, 2010
For our first merger arbitrage example, we look at BRK's acquition of BNI. Berkshire Hathaway Inc (BRK/A) announced on November 3, 2009 a definitive agreement to acquire the 77.4% of Burlington Northern Santa Fe Corp (BNI) not already owned by BRK for $100/share in cash and stock. The deal price represented a 32% premium to BNI’s November 2nd closing price. The expected closing of the merger is in the first quarter of 2010. We will analyze various aspects of this transaction, including the offer structure, valuation, and the regulatory process.
The Burlington deal certainly answered the questions of what Berkshire Chairman and CEO, Warren Buffett, plans to do with the company’s $23.8 billion cash balance (as of September 30, 2009). The $44 billion transaction value makes BNI Buffett’s largest acquisition. It also provided a glimpse of how Buffett is seeing things, as he is an investor who is widely followed, and indeed, worthy of respect and emulation. Buffett called this deal “an all-in wager on the economic future of the United States”. Moreover, the merger, which Buffett deemed “a huge bet…on the railroad industry” caused Burlington peers Union Pacific Corp (UNP), CSX Corp (CSX), and Norfolk Southern Corp (NSC) to gain an average of 6.8% on November 3rd.
Let’s assume that it is November 2nd and we get into the office hearing the merger announcement. What is the first thing we do? First, we have to spend time to dissect the merger announcement. Risk arb is about being meticulous, or as Schoenberg, the composer, once said “the only way that does not lead to Rome is the middle way.”
The first read of the announcement reveals that we will have to deal with prorationing and a collar structure (we will deal with them in-depth in a later post). The agreement provides that each BNI share will elect either $100/share in cash or a variable amount of Berkshire Class A or Class B common stock, subject to proration if the elections do not equal 60% cash and 40% stock. Proration is required because investors generally prefer cash, and this limits the amount of cash that Berkshire has to pay out. The stock element is accompanied by a collar, whereby the price of Berkshire stock determines the number of shares payable to Burlington stockholders. There are different types of collars but for this transaction, the value of each Berkshire share received is fixed at $100 if the price of BRK/A at closing is between $80,000 and $125,000/share (BRK/A was $98,750/share at announcement). The ratio will be fixed at 0.001253489 shares of BRK/A per BNI share for values below the collar range, and 0.000802233 shares of BRK/A per BNI share for values above the collar range. While the majority of the shares issued will be Class A, for the holders of smaller amounts of BNI who elect the stock payout, Class B shares will be needed. To facilitate this, Berkshire’s board approved a 50-for-1 split for its Class B stock. This split is subject to shareholder approval (we already know that the stockholder vote will take place on January 20th).
So once we know the transaction structure, we can take a closer look at the risks related to the transaction. From the date of announcement our brain focuses on one single question: what could derail the deal from closing? We have to look for every single risk element, even if some of them may seem irrelevant now. Never forget that something irrelevant now could become decisive at a later stage (especially if the deal takes several months to close).
The first step will be valuation. The Burlington deal was announced pre-open, so we need to have an idea of where the price will open. If the deal undervalues the target, the stock price could trade above the deal price (there could be counter bidders, or stockholder opposition to the deal). If the deal overvalues the target, then the bidders’ stockholders could oppose the deal, or the spread could simply be too tight to enter. For the Burlington deal, $100/share values BNI at about 8.4x consensus 2010 EBITDA. This multiple is above the average 6.9x where the aforementioned comps (UNP, CSX, and NSC) are trading. Another metric to consider is the multiple at which previous deals in the space were reached, and in this case, the prior Railroad deals analyzed were done at an average of 10.0x (not an alarmingly large discrepancy considering current market conditions). Additionally, the 32% premium to the November 2nd close for BNI’s share price is in-line with the premiums for previous Railroad deals. In short, the valuation is fair, and BNI should not trade through (with a negative spread), nor should it have an inordinately large spread. The transaction requires approval from two-thirds of BNI’s shareholders (other than the share held by Berkshire). So given our valuation analysis, we conclude that the stockholder vote is unlikely to be an issue (who would vote against Buffett?).
The second step in risk localization is regulatory approvals. A merger typically has to be approved by regulatory authorities. The most obvious regulatory authority is US antitrust (Federal Trade Commission and Antitrust Division of the Department of Justice). The Hart Scott Rodino Act is very important, and deals often trade based on the perception of how well/poorly the HSR review is going (we will look at them in more detail in a later posting). Having read the announcement, we know that the transaction requires antitrust clearance under HSR, and approval by the Federal Communications Commission (FCC). This deal poses little antirust risk, since BRK is not a prominent railroad operator. No wonder that BRK received HSR clearance quickly, on December 4th. The FCC is usually an important regulatory authority for telecom-related deals, however, we assign a low probability to FCC related issues here, given that the only reason the deal requires FCC approval is that trains use radios to communicate with the communications center. The deal has since received FCC approval. So, provided the low antitrust risk, we determine that the estimated first quarter closing is manageable.
Our analysis for the merger announcement day is more or less complete. We have done the job that was necessary to decide whether we want to enter the trade. The Burlington – Berkshire deal is a fairly safe transaction for merger arbitrageurs. The buyer is legitimate, the strategic rationale makes sense, there is no regulatory concern, and financing is not an issue. The market opens and although the spread is tight, we like the deal. In the meantime we wait for the next step in our risk localization process: the publication of the Merger Agreement. The current spread is 0.9%, which represents a 7.6% annualized return, assuming an early March deal closing. Now, 7.6% a year is hardly the most attractive opportunity for capital allocation, but due to its safety, it is position in many arbitrage portfolios (and let’s not forget about the current low interest rate environment). We will some cover higher risk, higher return situations in the future.