Tag Archives: mergers and acquisitions

takeovers and market price indications: Softbank/Arm Holdings

July 20, 2016 By in mergers and acquisitions, Risk Arbitrage, Uncategorized Tags: , , , , , , 1 Comment

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.

 

 

 

Softbank and Arm Holdings (ARM)

July 19, 2016 By in mergers and acquisitions, semiconductor manufacturing, Uncategorized Tags: , , , 1 Comment

My thoughts:

–the price Softbank is offering for ARM seems very high to me.  That’s partly intentional on Softbank’s part, not wanting to get into a bidding war.  It’s also based on Softbank’s non-consensus belief that the development of the Internet of Things will be a much bigger plus for ARM than the consensus understands.

–I’m rereading the resignation of Nikesh Arora as a sign of his disapproval of the acquisition, not of Masayoshi Son’s remaining at the helm of Softbank

–ARM seems to be content to be bought.  And why not?  Holders of ARM stock and options will get a big payday.  Softbank has no semiconductor design expertise, so ARM will likely run autonomously under the Son roof.  Softbank is also apparently promising to keep the company headquarters in the UK as well as to substantially increase the research staff.

–A competing bid is unlikely.  That’s mostly because of the price.  But ARM management knows it would never have the operating freedom as a subsidiary of Intel or Samsung (the most logical other suitors) that it would as part of Softbank.  When the company’s assets leave in the elevator every night, any unfriendly bid is inherently risky.  Doubly so when it threatens a really sweet deal.  No, I don’t think antitrust issues would be a deterrent to a bid.

–Will the UK allow the deal?  The Financial Times, which should be in a position to know, suggests that the UK might not.

How so?

ARM is basically the country’s only major technology company, so domestic ownership may be an issue of national prestige and pride.  There’s certain to be some opposition, I think.  And crazier things have happened.  For example, France disallowed Pepsi’s bid for Danone on the argument that the latter’s yogurt is a national treasure.  In the late 1970s, the US barred Fujitsu from buying Fairchild Semiconductor on grounds that foreign ownership presented national security risks   …and then allowed it to be sold to French oilfield services firm Schlumberger.  More recently, the US scuttled the sale of a ports management business that runs Newark and other US ports to the government of Dubai, an ally, on security grounds.  The would-be seller was also foreign, P&O of the UK.

This is the major risk I see.

Microsoft (MSFT) and LinkedIn (LNKD)

June 14, 2016 By in mergers and acquisitions, Uncategorized Tags: , , , , , , Leave a comment

Before the open in New York yesterday, MSFT and LNKD announced that the latter has agreed to be acquired by the former in a friendly all-cash deal for $26.2 billion, or $196 per LNKD share.  Satya Nadella, the MSFT chairman, describes the merger as the coming together of the professional cloud with professional networking.  The acquisition price, a 50% premium to where LNKD was trading beofe the announcement, represents a bit less than 7% of MSFT’s market capitalization.

The most interesting aspect of the deal is that MSFT shares only fell by 2.6% in trading yesterday, in a market that declined by 0.8%.  To me this is indicative of the tremendous positive mindset change that has happened by investors about MSFT since the end of the disastrous Steve Ballmer era.

 

 

value investing and mergers/acquisitions

June 13, 2016 By in capital spending and the business cycle, Capital-intensive firms, capitalizing vs. expensing, mergers and acquisitions, return on equity vs. return on capital, Uncategorized Tags: , , , , Leave a comment

buy vs. build

When any company is figuring out how it should grow its existing businesses and potentially expand into other areas, it faces the classic “buy or build” problem.  That is to say, it has to decide whether it’s more profitable to use its money to create the new enterprise from the ground up, or whether it’s better to acquire a complementary firm that already has the intellectual property and market presence that our company covets.

There are pluses and minuses to either approach. Build-your-own takes more time.  The  buy-it route is faster, but invariably involves purchasing a firm that’s only available because it has been consigned to the stock market bargain basement because of perceived operational flaws.  Sometimes, acquirers learn to their sorrow that the target they have just bought is like a movie set, something that looks ok from the outside but is only a veneer.

when the urge is greatest

Companies feel the buy/build expansion urge the most keenly at times like today, when they are flush with cash after years of rising profits.

so why isn’t value doing better?

Many economists are explaining the apparent current lack of capital spending by companies by arguing that firms are opting in very large numbers to buy rather than to build.

The beneficiaries of such a universal impulse should be value investors, who specialize in holding slightly broken companies that are trading at large discounts to (what value investors hope is) their intrinsic value.  Growth investors, on the other hand, typically hold the strong-growing companies with high PE stocks who do the acquiring.

On the announcement of a bid, the target company typically goes up.  The bidder’s stock, on the other hand, usually goes down.  That’s partly because the bid is a surprise, partly because the target is perceived to be priced too high, partly simply because of arbitrage activity.

All this leads up to my point.

Over the past couple of years, growth investing has done very well.  Value has lagged badly.  How can this be if merger/acquisition activity continues to be large enough that it is making a significant dent in global capital spending?

 

 

Avago (AVGO) and Broadcom (BRCM) …and Intel/Altera

May 29, 2015 By in activist investing, mergers and acquisitions, semiconductor manufacturing, software, stock market, Technology Tags: , , , , , , , , , , , , Leave a comment

Two days ago the rumor hit Wall Street that chipmaker and serial acquirer AVGO had found its newest target, BRCM.  Yesterday the offer was announced:  cash and AVGO stock, in approximately 45/55 proportions, totaling $37 billion.

my thoughts

When customers in a given industry group become bigger and more powerful, the natural response among suppliers is to do the same.  This is part of what is going on here.  More than that, AVGO appears to seek out companies whose technological virtuosity far outstrips their management skills.  So it gains not only the marketing benefit of size but also the rewards of improving the profitability of firms whose main virtue has been their intellectual property.

What’s striking about this deal is that in revenue terms AVGO is more than doubling its size.  Although I have no intention of selling the AVGO shares I own, experience says that acquirers often bite off more than they can chew when they make the jump from small acquisitions to super-size ones like this.

One of AVGO’s rumored other targets had been Xilinx (XLNX), the junior partner with Altera (ALTR) in the field programmable gate array duopoly.  I had thought that ALTR would feel more favorably disposed to overtures being made by Intel (INTC), given the possibility that AVGO would buy XLNX and turn the firm into a much more aggressive competitor.  That threat is now gone.  INTC must now rely on pressure on ALTR management from its major shareholders (shareholders are, after all, legally the owners of ALTR and the employers of management) to return to the negotiating table.

As a practical matter, managements have a lot of autonomy, despite the fact that we the shareholders are, technically speaking, the bosses.  Wall Street seems to believe that ALTR is holding out for a higher price from INTC.  While that may be the rhetoric being used, I think the real issue is more basic.  Who would want to go from being the master of all he surveys as the top dog (and treated as a demigod) at a major publicly traded company to being a near-invisible division head in a conglomerate?