M&A Updates

There hasn’t been much M&A activity of late–only about a handful of mergers were announced in August. Most of these recent deals involved some element of stock swapping which is something I try to avoid because you never really know where the stock of the parent company is going to be come deal close. Depending on market and sector conditions, it could be a lot lower than its current value which makes buying the stock of the acquiree (i.e., the company that is being taken over) too soon an unprofitable move.

Not that I want to dismiss these types of plays entirely, but the smarter way to play them is to wait about a month or so before the expected closing date of the merger. Check out the stock of the parent company and if it looks like it’s rising and the market is rising along with it, then buying the stock of the acquiree can be a profitable move.

Why? Because when the deal closes, the stock swap will be worth more. (You’ll see that in M&A deals involving stock swaps, the stock chart of the acquiree will mimic that of the acquirer for this very reason.)

Let’s take a brief look at two such deals.

The first is oil services company Baker Hughes’ (BHI) proposed acquisition of BJ Services (BJS). This is a cash and stock swap deal that will pay $2.69 in cash plus 0.4005 shares of BHI per one share of BJS. The second is Disney’s (DIS) proposed acquisition of Marvel Entertainment (MVL) for $30 in cash plus 0.745 DIS share per share of Marvel. Both deals have board approval and they both are expected to close sometime near the end of the year.  Both must also meet customary shareholder and regulatory (anti-trust) approval. (In most instances, regulatory approval has been a formality but lately government agencies have been scrutinizing these deals more closely as we’ll see below.)

Since this past Monday when both deals were announced, the stock charts of each of the merging companies have paralleled each other. (DIS/MVL is down; BHI/BJS is up.) So, when would be a good time to buy into these deals? I’d say check out company news starting about a month or so before expected deal close. If shareholder approval has been met and there doesn’t seem to be any regulatory hurdles, then buy into the deal if the price of the parent  company (and the market) is rising.

But take note of resistance and support levels! Right now, Disney is trading over $25. It has major support levels at $25, $22, and $19. Baker Hughes (BHI) has been channeling between $34 and $42. Lately it’s been staging a bounce off lower support but the cycles have been short (about a month and a half) so that you should be able to catch another bottom around mid-October. If, on the other hand, the stock breaks down, next major support isn’t until $27.

Current MANDA holdings
There are only four holdings in my M&A portfolio (MANDA) and three of them are on thin ice–wah!  First off, what’s up with AT&T’s (T) bid for Centennial Communications (CYCL)? The deal was expected to close by summer but has been pushed back to September 30th. There’s silence on both sides which has led investors to speculate that the DOJ has some antitrust issues with the merger. Some feel that AT&T may resent the DOJ’s bully tactics and walk away from the deal, according to a recent Wall Street Journal article. I certainly hope not! Right now, CYCL is below the price I paid for it in MANDA. Today, it bounced off of previous support on higher volume, an encouraging sign. With only a few weeks left, we don’t have long to see if this one will pay off.

But the US doesn’t have a monopoly on government intervention. Today, European Union regulators launched an in-depth probe into the Oracle (ORCL)/Sun Micro (JAVA) merger. The deal has already been cleared by the government here and this new wrench in the gears could push back the closing date to sometime next January. According to a Reuter’s article, this push-back could erode share price giving competitors time to steal customers.

The good news is that legal experts and analysts following the review feel that the deal will ultimately be approved pending certain concessions. I’ll take their word for it and hang in there but if I see the price of CYCL drop below $9.00, I’m exiting my position.

The third MANDA holding, Varian (VARI), is being hit with various shareholder lawsuits involving the proposed merger with Agilent (A) for $52 per share in cash. Shareholders are angry because the stock was trading at $70 in 2007 and they feel they deserve more, even considering the stock was trading at $20 at the March low. Could they reasonably expect more? Who knows, but I think the thing that really got their goat was the no-solicitation provision and the $46 million termination fee.

I guess I’d be angry, too, but I’m wondering if the Varian board isn’t really all that stupid. Might they not know something that we don’t? Food for thought.

My other MANDA holding, master limited partnership Hiland Partners (HLND), is free from any sort of legal entanglements–surprise! But there’s still time left before the deal closes, and what with my luck…

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