Softbank is bidding £17 per share for ARM, an offer that management of the chip design company has quickly accepted. ARM closed in London at £16.61 yesterday, after trading as high as £17.52 in the initial moments of Monday trading–the first time the London market was open after the bid announcement.
What is the price of ARM telling us?
Let’s make the (reasonable, in my opinion) assumption that the price of ARM is now being determined by the activity of merger and acquisition specialists, many of whom work in companies mainly, or wholly, devoted to this sort of analysis.
These specialists will consider three factors in figuring out what they’re willing to pay for ARM:
–the time they think it will take until the takeover is completed (let’s say, three months),
–the cost of borrowing money to buy ARM shares (2% per year?) and
–the return they expect to make from holding the shares and delivering them to Softbank.
They’ll buy if the return is high enough. They’ll stay on the sidelines otherwise.
Suppose they think that without any doubt the Softbank bid for ARM is going to succeed–that no other bidder is going to emerge and that the takeover is going to encounter no regulatory problems (either delays or outright vetoing the combination). In this case, the calculation is straightforward. The only real question is the return the arbitrageur is willing to accept.
I haven’t been closely involved in this business for years. Although I know the chain of reasoning that goes into determining a potential buy point, I no longer know the minimum an arbitrageur considers an acceptable. If it were me, 10% would be the least I’d accept if I thought there were any risk; 5% might be my lower limit even if I saw clear sailing ahead. If nothing else, I’m tying up borrowing power that I might be able to use more profitably elsewhere.
Let’s now look at the ARM price.
At £16.61, ARM is trading at a 2.3% discount to the offer price. An arbitrageur who can borrow at 0.5% for three months stands to make a 1.8% return by buying ARM now. Ugh! The only way to make an acceptable return, if the assumptions I’ve outlined above are correct, is to leverage yourself to the sky.
From this analysis, I conclude two things:
–the market is not worrying about any regulatory impediments to the speedy conclusion of the union. Quite the opposite. Otherwise, someone would be shorting ARM.
–buyers seem to me to be speculating in a very mild way that a higher bid will emerge. If they had strong confidence in another suitor coming forward, the stock would be trading above £17. If they were 100% convinced that there would be no new offer, I think the stock would be trading closer to £16.25, a point which would represent an annualized 20% return to a purchaser using borrowed money.