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  #1  
Old 09-08-2005, 11:16 AM
MrMon MrMon is offline
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Default Good Deal or Bad Deal?

Yes, it's dull, it's boring, and it's not going to be a 10 bagger. But it's also a low risk way to make 8% in less than 4 months. Why is this not a good deal, even if you take delays into account. (I've seen nothing on the deal being possibly blocked, which is the other risk.)

Nasdaq Stock Market Inc. (NDAQ), Instinet Group Inc. (INGP)

Current discount: $0.44 or 8.09%
Acquirer: NDAQ
Target: INGP
Offer per share: $5.44 cash
Value of outstanding common equity: $1,878,976,000
Target share price: $5
Expected closing: Year end 2005 12/31/2005
Annualized gain: 28.18%
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Old 09-09-2005, 05:50 AM
squiffy squiffy is offline
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Default Re: Good Deal or Bad Deal?

That seems like an unusually high percentage premium. I suppose there is some doubt about the deal going through. The stock was trading higher recently, so perhaps this suggests the deal may not go through as it may undercompensate the sellers.

Typically the buyer pays some premium to the market price. This is actually below the recent market prices of 6.50 or so. Very strange.

I don't know much about either stock. It's important to have confidence in the long term earnings potential of the target, in case the deal falls through and you have to hold onto it for awhile.

22 seems like a pretty high PE. The target only earned about 2 cents last quarter, down from 4 cents the prior year. Not very impressive.

But obviously, if the deal goes though, a great return.
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Old 09-09-2005, 05:50 AM
squiffy squiffy is offline
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Default Re: Good Deal or Bad Deal?

Obviously, let's follow and see what happens. Please keep us posted on developments.

I really like this kind of specific post. It really gives us an opportunity to analyze specific opportunities and discuss the pros and cons.

And if you live below sealevel, always remember to reinforce your local levees, even if the Federal Government does not pay for it!!!
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Old 09-09-2005, 11:42 AM
MrMon MrMon is offline
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Default Re: Good Deal or Bad Deal?

I get a list of mergers every morning and occasionally things like this pop up. They're not sexy, but if you invest in a string of them, they seem quite profitable and relatively low risk, especially if it's a cash offer.

Other tempting opportunities, you decide the risks:

Medicis Pharmaceuticals Inc. (MRX), Inamed Corp. (IMDC)

Current discount: $5.10 or 6.49%
Acquirer: MRX
Target: IMDC
Offer Per Share: 1.4205 shares and $30 per share
Value of offer per share: $78.57
Value of outstanding common equity securities: $2,851,978,289
Acquirer share price: $34.19
Target share price: $73.47
Expected closing: End of 2005 12/31/2005
Annualized gain: 22.41%

Whirlpool Corp. (WHR), Maytag Corp. (MYG)

Current discount: $2.20 or 10.48%
Acquirer: WHR
Target: MYG
Offer per share: $21 cash and stock
Value of outstanding common equity: $1,677,900,000
Acquirer share price: $78.42
Target share price: $18.80
Expected closing: First quarter 2006 2/15/2006
Annualized gain: N/A
Note: Maytag shareholders will receive, for each share held, $10.50 in cash
and between 0.1144 and 0.1398 of a share of Whirlpool stock. Maytag
shareholders will receive 0.1144 of a share of Whirlpool stock if the
average Whirlpool stock price is $91.79 or greater and 0.1398 if it is
$75.10 or less. Between the two prices, the exchange ratio will vary
proportionately.
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  #5  
Old 09-09-2005, 11:43 AM
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Default Re: Good Deal or Bad Deal?

I would be hesitant to assume that this is a great deal, because this is a situation where insiders will have a lot better knowledge than retail investors. People on Wall Street will know the details of Nasdaq's situation and why this deal might not go through. In this particular situation, I think the market has probably priced the target efficiently.

As for the acquiring price being lower than the previous market price, what probably happened is that the target company had been bid up significantly on rumors of an acquisition. Nasdaq is still paying a premium to the true value of the target, it's just that that premium had already been incorporated into the price.

I'm in a similar situation with Reebok, which is being bought by Adidas. The offer price is $59, and RBK is trading around $57. This discount is largely based on the cost of money. I don't think this is a particularly good opportunity either, I just haven't found anywhere else to put my money.
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Old 09-09-2005, 11:54 AM
MrMon MrMon is offline
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Default Re: Good Deal or Bad Deal?

I've noticed the Adidas-Reebok deal and you are correct, the discount is pretty much based on time value of money. The deal has a long time frame.

Adidas-Salomon AG (ADS.XE), Reebok International Ltd. (RBK)

Current discount: $2.35 or 3.98%
Acquirer: Adidas
Target: RBK
Offer per share: $59 cash
Value of outstanding common equity: $3,522,300,000
Target share price: $56.65
Expected closing: First half of 2006 3/31/2006
Annualized gain: 7.46%

That said, I'm keeping an eye on it. Right now, it's not such a good deal, but later on, if Reebok fails to rise in price, then the annualized premium might just make it a good deal, especially as certain regulatory hurdles are cleared.

We like to think the markets are efficient, but in merger situations it seems that they often aren't. Since the target stock has a price ceiling, analysts often seem to stop covering it and it goes off the radar. Irrationality can also take over, take a look at JNJ-GDT. GDT had their problems and there were rumors of a reduction in price, but now things seem stable and we're just waiting for October FTC approval.

Risks, yes. But how many people are investing in high flyers with incredible risk, hoping they'll hit that 10 bagger? It's all relative.
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  #7  
Old 09-09-2005, 01:38 PM
DesertCat DesertCat is offline
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Default Re: Good Deal or Bad Deal?

[ QUOTE ]


We like to think the markets are efficient, but in merger situations it seems that they often aren't. Since the target stock has a price ceiling, analysts often seem to stop covering it and it goes off the radar. Irrationality can also take over, take a look at JNJ-GDT. GDT had their problems and there were rumors of a reduction in price, but now things seem stable and we're just waiting for October FTC approval.

Risks, yes. But how many people are investing in high flyers with incredible risk, hoping they'll hit that 10 bagger? It's all relative.

[/ QUOTE ]

Well the merger markets can be more rational than you realize, especially in the larger cap mergers. The first key is to avoid the doggy deals. Assume the best deals have a 5-10% chance of blowing up. Lower quality deals have even more risk. Estimate the value of the target if the deal falls apart, i.e. your loss. Early on I made the mistake of investing in a deal where the target went immediately into bankruptcy when the deal collapsed.

Once you estimate the success rate, do the math. Does your gain the percent of times if the deal goes through outweigh your losses the percent of times it doesn't?

Merger arb is a great way to earn a fat annual return, but the other trick is, as in poker, in bankroll management. You'll consistantly make 3-10% in a few months on each deal, until you lose 50% in a day like I once did (thankfully on a small position). So if you want to do them, do more than one, and keep each individual deal to a manageable portion of your portfolio. If I was doing them full time a reasonable goal would be 10-20 deals and each deal no more than 10% of my portfolio. More deals and smaller percentages would be better.

If you are doing them as a sideline to regular investing, just try to keep it to a small portion of your portfolio.
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  #8  
Old 09-09-2005, 02:09 PM
MrMon MrMon is offline
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Default Re: Good Deal or Bad Deal?

Good advice.

I think merger arbitration is overlooked by most smaller investors, but if you spread the risk and pick your deals, there are some pretty good rewards to doing it.
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  #9  
Old 09-09-2005, 09:37 PM
squiffy squiffy is offline
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Default Re: Good Deal or Bad Deal?

Yes, one or two books I read, about Warren Buffett, expressly mentioned that he likes this kind of arb opportunity. If the conditions are right, it can be a nice investment. Thanks for posting this. Keep the ideas coming.

When I have more time I will post my recollections of my one semi successful attempt.
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