Yesterday, it was reported that the FTC was going to investigate into potential anti-trust issues in the Google/Doubleclick deal.
That puppy was for a whopping $3.1B, and triggered a plethora of deals, including Yahoo!/Right Media ($800M valuation), WPP/24/7 RealMedia for $680M and MSFT/aQuantive for $6B.
But this begs the question, in a market that is strong-form efficient (all info be it public or private is reflected in stock), can the stock market give a quantifiable probablity that a deal won’t go through?
The Google/DCLK and YHOO/Right Media deals involve private firms, so the answer there is no.
But WPP/TFSM and MSFT/AQNT involve public companies so let’s examine this:
The latter, an all-cash deal, was for $66.50 per share, yet today, the stock is still only at $63.75, or 4.1% off the purchase price. In terms of market cap, AQNT is at $5.03B though the price tag was $6B. That would suggest one can make a 19.28% return… (note: don’t do this! I am not an investment professional and I am sure there is something I am missing, hence why I’m posting this, to find out).
It’s not like the difference is cash, since AQNT has $296M (according to Yahoo! Finance). It also has $80M in debt, so a net cash of $216M. Clearly, this does not explain why the market is hitherto valuing AQNT at $5.03B when MSFT is eager to give shareholders $6B.
Alternatively, it’s worth noting that TFSM is at $11.72 and the buyout price is for $11.75… not much room for arbitrage there. Then again, the market cap is at $598M though the price WPP is to pay is $649M. That’s off by 8%, or $51M, but TFSM has $62M in cash, and $15M in debt… so $47M net, so maybe it’s that?
Is that the transaction costs? Maybe. But who pays for that: buyer or seller. I guess it depends.
Or, maybe the market is saying that there is a probablity that the deal won’t go through?
I don’t - in all honesty - know why, but it’s interesting. If someone knows, please chime in in the comments or email me at ash@mojosupreme.com.
UPDATE #1: From Howard Lindzon, investor and entrepreneur:
“Just merger arb guys betting on the deal and that’s the risk spread the big big money is taking. In the AQNT deal the big money says that there is a bigger chance this deal could get changed.”
I’ll post as people send me their two cents.
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May 31st, 2007 at 1:47 pm
Yes, the stock market reflects the “collective wisdom” (or ignorance, as the case may be) concerning the likelihood that a deal will go through.
In the case of MSFT and AQNT, there needs to be a substantial gap between the offer price and the current market price of AQNT for two reasons because there is a very significant risk of losing a lot of money if the deal doesn’t go through.
Remember, MSFT is offering a huge premium over the prior market value; if the deal falls through, there is no assurance anyone else will want it, and the price could plunge right back to it prior level.
Plus, there is the possibility of the deal hitting not passing muster with the antitrust folks — in fact, it isn’t inconceivable that the MSFT offer is partly designed to make it harder for the FTC to approve Google’s Doubleclick acquisition — do the Fed’s really want that much concentration in such an important sector of the economy?