Mergers and acquisitions have always been one of the special event-driven transactions, and in times of high market uncertainty, they tend to spread risks more easily.
Some recent mergers and acquisitions cases include:
U.S. Steel
On December 18th, Japan's Nippon Steel Corporation (NPSCY) announced that it would acquire U.S. Steel (X) for $55 per share, totaling $14.9 billion in cash. This represents a 142% premium based on the previous price and a 10.9% premium based on the closing price on December 18th. Four months earlier, Cleveland-Cliffs Inc. (CLF) had initially proposed an acquisition price of $35 per share, which was later increased to $40 per share.
Investment Highlights
1. The valuation of 7.3 times EBITDA is very generous for Nippon Steel shareholders, but the synergistic effects may not be sufficient, leading to pressure on Nippon Steel's stock price. On the other hand, CLF's shareholders may feel relatively relieved.
2. As Nippon Steel and U.S. Steel are based in two different countries, they require cross-border regulatory approvals. However, compared to domestic regulation in the U.S., the difficulty is lower (as there is no significant change in market concentration). The close alliance between Japan and the U.S. means that it largely depends on the U.S. regulatory approval.
3. There is a possibility that CLF will continue to increase its offer price.
Strategy
Since the transaction is expected to be completed around Q3 2024, the 10% premium actually translates to an annualized return of less than 20%. Considering the current risk-free interest rate, the risk compensation is not high. Therefore, holding the underlying stock may not be the best choice. At the same time, considering regulatory risks and the risk of further price increases, selling naked calls is also not recommended. Selling puts near the current price may be the highest-yielding choice in terms of annualized returns.
SNOWFLAKE
$Snowflake(SNOW)$ announced its acquisition of data clean room company Samooha as part of its continued development of its data suite. Samooha operates by allowing companies to share data with external partners in a way that complies with security and privacy requirements. This virtual cloud space allows multiple parties to analyze data without directly accessing or exposing it.
The current terms of the transaction have not been disclosed.
Previously, $Amazon.com(AMZN)$ AWS, $Microsoft(MSFT)$ Azure, $Alphabet(GOOG)$ Google all have their own data clean rooms, while Snowflake was an early investor in Samooha.
Strategy
It is expected to have a positive impact on SNOW's performance in the next few quarters. Considering the arrival of an interest rate cut cycle, growth stocks will continue to benefit, so holding SNOW's underlying stock directly is a good choice.
Hawaiian Airlines
$Alaska Air(ALK)$ announced its acquisition of $Hawaiian(HA)$ for $18 per share in cash. Currently, HA's price is $13.75, representing a remaining premium of 31%.
Investment Highlights
1. As they are all relatively regional airlines, the synergistic effect is strong, and the combination of complementary domestic, international, and cargo networks will enhance competitiveness, expanding the choices for consumers on the US West Coast and in the Hawaiian Islands. The company conservatively estimates annual synergistic benefits of $235 million and expects to achieve high single-digit profit growth in the first two years, followed by high double-digit profit growth thereafter, with a return on investment of mid-teens in the third year.
2. Compared to acquiring a low-cost airline, the merger of these two regional airlines is more likely to obtain regulatory approval.
Strategy
Due to the poor operating base of Hawaiian Airlines, if the acquisition is unsuccessful, its inherent value should not exceed $7-8 per share, so there is still a significant premium remaining in this acquisition case.
However, on the other hand, $18 per share is actually not suitable for many HA shareholders, as a large number of shareholders have a cost basis higher than $18, so it is not ruled out that the shareholders' meeting will be intense, which may prolong the final determination of the event, and even demand an increase in the offer price (but the resulting benefit is limited, so the price increase is also limited in time).
The cost-effectiveness of holding a Protective PUT combination is relatively higher, that is, holding HA common stock and buying a PUT as insurance against a decline. Of course, if you are more confident, you can also directly hold common stock or buy CALL options.
In addition, the bull market PUT spread strategy is also the most cost-effective strategy, that is, buying a low-priced PUT and selling a high-priced PUT, which provides more security than directly selling PUT options.
Farfetch
Korean e-commerce giant Coupang, Inc. has agreed to acquire Farfetch's business and assets and has provided a bridge loan of $500 million, with interest calculated at an annual rate of 12.5% and compounded monthly.
Investment Highlights
1. This is basically not an acquisition but a "bargain hunting" before bankruptcy. Although Farfetch is an established luxury e-commerce platform and has received investments from JD, Alibaba, and Tencent Holdings (00700), its operations have been in disarray in recent years, with consecutive losses and over $600 million in loans to repay. The stock price has also been declining, and major shareholders have abandoned ship, with the company on the brink of delisting.
2. It seems that Coupang wants to acquire Farfetch but has provided a high-interest loan, and if this loan is not repaid, it will take over the assets. In this light, even if acquired, it would be very unfriendly to existing shareholders. (Not to mention small shareholders, even major shareholder Compagnie Financiere Richemont AG would have to take a hit)
3. It's somewhat like a "shell sale" in the A-share market, but under US stock market rules, it's impossible to sell at a good price. It is not advisable to pursue any strategy; if you want to speculate, a small position would suffice.
IRobot
$Amazon(AMZN)$ plans to acquire $iRobot(IRBT)$ for $1.4 billion, or $51.75 per share, with the current price of IRBT at $37.18, representing a 39% premium.
Investment highlights
1. The buying and selling parties are not quite equal. For Amazon, it is a very small acquisition, and if it is not successful, paying a breakup fee will not have much impact on the company. For iRobot, it is a matter of life and death, as its cash flow cannot support the current acquisition negotiations, and the money is still borrowed at a high interest rate (12.5% bridge loan).
2. Currently facing opposition from European regulators, who believe it will create a monopoly in the robotic vacuum market. However, this matter is still controversial, as iRobot's business is not that large.
Strategy
Due to the currently high premium rate, which implies the risk of an unsuccessful acquisition, the implied volatility (IV) is also relatively high. However, compared to holding the stock alone, buying an additional PUT to form a Protective PUT for risk protection is a better option.
At the same time, since Amazon has lowered the target price for this acquisition (because it is not equal, IRBT has no choice), it is suitable to Sell Naked Call, and the target price may even be further reduced in the future.
If you insist on using Sell PUT, it is recommended to use a Bull Put Spread strategy, selling a higher-priced PUT and buying a lower-priced PUT.
Spirit Airlines
$Spirit Airlines(SAVE)$ received a takeover offer from $JetBlue Airways(JBLU)$ for $31 per share, with the stock price fluctuating several times in the past and currently just passing $16, representing a 93% premium.
Investment highlights
1. As the target of the acquisition is a low-cost airline, regulators believe that the acquisition will affect ticket prices. Therefore, even industry insiders believe that the success rate of the acquisition is only about 60%. Previously, SAVE has continuously divested some assets to reduce regulatory concerns.
2. This case is supervised by the DOJ (Department of Justice) rather than the FTC (Federal Trade Commission), and historically the DOJ has been relatively strict on airline mergers. Therefore, there is great uncertainty in this acquisition case.
3. SAVE also faces operational efficiency issues, and if the acquisition fails, there is a risk of a significant decline in stock price.
Strategy
Currently, SAVE's IV is very high, almost over 200%, which also represents uncertainty, and there may be preliminary results in the next one or two months.
Therefore, it is best to participate lightly in this acquisition case because it may experience significant volatility. The current IV also does not suit a Straddle strategy.
Relatively speaking, for those with lower risk appetite, they may choose out-of-the-money Bull Put Spread strategies, for both Call and PUT options.
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