Archive for the ‘M&A – Special Situations’ Category

Dell LBO Update:

July 21, 2013 Leave a comment

As an update to my previous post regarding the Dell LBO, I received the Notice of Special Meeting of Stockholders in the post sometime back and am entitled to vote on the buyout for which I intend to vote against. The meeting was postponed, but with rumors that Dell and SL  not seeking additional financing. Either this is a head fake, and Dell’s already got some cash reserve for a last minute deal sweetener, which really should tow this buyout past the finish line. An offer of 14 would seal the deal without doubt (since Icahn offered 14 with public stub and claimed it to be superior). Perhaps they may offer 13.8 just before the next meeting (which was meant to have occurred last week)?  A marginally increased offer and Michael Dell’s personal last minute ‘wheeling and dealing’  and arm twisting should easily suffice. Because frankly, I believe the shareholders fear the failure of Dell – SL buyout as much as they fear Icahn being in control. An increased offer would be acknowledging Dell – SL could have offered higher in the first place – a sort of tacit acknowledgement that Icahn the vulture did provide a positive service to shareholders (not to mentioned his own profit). So I suspect, if a higher offer is to come, it will not allow anyone the chance to counter offer. Plus Dell & SL is so close to the finish line now that any PR damage or additional costs from a deal sweetener that could shut dissenting shareholders and Icahn up is probably worth paying for in their opinion.

I previously accumulated shares before the buyout was announced and added to my position (past the voting cut-off date). As it stands, if the buyout goes through at 13.65, it is not in my interest because I bought a lot of cheap put options (Sep 20 – 13 Puts, Jan 17 – 13 Puts, Feb 21 – 13 Puts). The profits will be offset by the losses arising from options expiring worthless. However, if  shareholders vote down the buyout with the intention of supporting Icahn, they still have to ‘vote in’ Icahn’s proposal which is an even longer shot by any yardstick. The interim volatility will benefit my options position. Dell as we know it will be ‘destroyed’, saddled with debt and run by a ‘corporate raider’. Perhaps profitable parts sold off? The fact of the matter is – right now, Dell probably has more ‘intrinsic value’ to interested buyers if it was broken up and sold in pieces . A recent FT article published 3 days ago basically said the exact same things that I wrote months earlier, including using the exact sentence  almost verbatim “Dell’s legacy is at stake…”.

As much as I’d like Dell to succeed, I am voting against it (in my own ‘selfish’ interest). I would not be surprised if other shareholders think and do the same. Which is why I believe any marginal last minute sweetener would secure Dell-SL the successful buyout.

I did not once look at the valuations, financial models or forecasts (I just didn’t have the time). Price action and game theory told me enough. Anyone trading this on fundamental valuation would have gotten crushed. The key was buying the put options for next to nothing when Dell was trading above offer price (market expected Dell-SL to increase their bid), when that did not happen and sentiment turned I accumulated more Dell shares – slowly levering up my position every time the market sentiment changed.

UPDATE: Well, guess what? Dell offered 13.75 + special dividends of 0.13, and Q3 dividend of 0.08 which will still be paid (since this has been dragging on) for effectively what is just shy of an all out offer of 14 which I wrote will all but surely seal the deal. If you read my original post, everything had came to past… Icahn was in for the quick buck, and he was right. The problem for Michael was, his cards were pretty awful to begin with even though he could call Icahn’s bluff. Icahn just had the upperhand all along. Icahn had the chips and was willing to go all in, Michael knew that. Problem was,.. Icahn knew that Michael knew that too.

UPS and TNTE failed merger counter arbitrage

January 15, 2013 Leave a comment

When mergers and acquisitions fail it turns to Murders & Executions for merg-arb desks. And when there is blood on the streets, even if it is your own blood, buy…

When the news of European Union anti-trust regulators blocking the potential UPS and TNT Express merger filtered through the newswire, the markets were not open. Prior to this, I have neither followed this industry nor the two respective companies. I brought up the charts of TNTE and noted the “undisturbed price” of TNTE, the target company that was being acquired, was around 6 Euros. The offer price by UPS was 9.5 per share. The shares of TNTE were last trading around 8.5 Euros. I made a mental note that if TNTE fell way below its undisturbed price – somewhere in the region of 20-25% below its undisturbed price of 6 euros, I would fade the trade and long it. This 20-25% represents my margin of safety. Implicit in this assumption and my trade rationale is that the market is fairly efficient in pricing-in information – that the undisturbed price represents fair value given TNTE’s prospects and outlook.   As it turned out, TNTE opened at 4.160 when trading resumed. I transmitted a market buy order (yeah, I know I just broke my own rule of never using market orders – but hey this is a “Special Situation” and rules are made to be broken) and got filled at 4.35. The following day, I closed the position out at 5.10. Although this is only a small stake and I made 17% return on capital with limited downside risk in one day, I never actively sought this trade out. Had TNTE opened down at 5 Euros or even 5.5, I probably would not have put this trade on. I did not have time to look at the fundamentals of either company. All I knew was, the merge-arb guys who believed the deal was going through would be crushed and had to dump their TNTE holdings in a market with no buyers thus depressing the stock way beyond its ‘fair value’. What is fair value? I don’t know. It is a subjective concept.  As the day wore on and I scanned the newswire, I noted that even though TNTE was trading at 8.5 before the announcement by EU regulators, the market was pricing in information that told me the market is not extremely optimistic that the deal would go through. Needless to say, this did not affect my rationale as I was already in the trade and my trade was based solely on a special situation and understanding of the dynamics of strategies pursued by merg-arb desks. Everyone knew TNTE would slump on the open, the question was by how much? And is that margin of safety something I was comfortable with? Was I willing to lose half my capital staked on this trade if it opened at 4 and traded down to 2? Compared to making 50% return if it traded back to 6? Which was a more likely scenario considering UPS made an offer of 9.5? As it turned out, it was a trade that I was comfortable with and made a quick profit. Why did I not buy pre-open with the chance of getting filled at a lower price say around 4.160 and maximise my profit? Well, I let the market tell me what to do. It could have easily opened at 4.16 and traded down to say 3.75. This would have messed up my conviction and trading psychology. Equally why did I take profits so early? Well, I recall a ‘market wizard’ once noted “the first 1/8 and the last 1/8 of a move are the most expensive ones”. I am not trading to be right and I am not great at timing the inflection point of the market. I am trading to be profitable and was happy with the return.




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