The second quarter of 2019 was a big one for U.S. mergers and acquisitions with 56 deals worth over $367 billion announced. This activity prompted us to write a report about the quarter and we decided to make it a regular feature of Inside Arbitrage. In our last report we wrote,
This Goldilocks economy is perfect for deal making with interest rates low because of international pressures (the trade wars and low/negative rates in Europe) and the domestic consumer remains strong after years of low unemployment. If these conditions persist through the end of the year, we are likely to see this elevated pace of deal making despite the fact that valuations continue to creep higher.
Quite clearly we were very wrong. The third quarter of 2019 was dismal for new deals with just 44 deals worth over $75 billion announced, a huge decrease year-over-year and from the prior quarter. Forty seven pending deals completed in Q3 2019 and two failed. There were also two instances where arbitrageurs were pleasantly surprised by higher offers when Liberty Tax (TAXA) agreed to pay 44% more to acquire Sears Hometown and BC Partners bumped its price for Presidio (PSDO) to $16.60 from $16 per share. The success rate for deals that closed or received a higher offer in 2019 was 96% and is inline with research we have done in the past. We wrote the following about failed deals in our last report,
What really surprised me was the failure rate for deals, which felt like it was higher this year but turned out to be consistent with the roughly 4% to 5% failure rate we have reported in our prior research here and here. Tight spreads for most deals, long drawn out regulatory approvals and a drop in the price of certain acquisition targets that once appeared safe were some of they key challenges arbitrageurs faced this year. On the positive side, we also saw several deals where new higher offers prevailed.
They say a picture is worth a thousand words and so we decided to put together this infographic that provides the key highlights for Q3 2019.
Four out of the five active deals with the largest spreads were also the deals with the largest spreads last quarter including Genworth (GNW), Pacific Biosciences of California (PACB), Spark Therapeutics (ONCE) and Sprint (S). Large spreads reflect the market’s skepticism of those deals and they sometime fail and at other times are delayed significantly. All four of these deals face domestic or international regulatory risks and a multi-faceted trade war is certainly not helping.
In Q2 2019 we had an interesting regulatory situation related to IBM’s acquisition of RedHat where Brazil revoked its approval right after the European Union approved the deal. The deal was eventually consummated and closed sooner than expected. Last quarter we had a similar situation with the merger of T-Mobile and Sprint where the companies entered into a consent decree with the U.S. Department of Justice shortly after announcing their decision to sell $5 billion in wireless assets to Dish Networks (DISH). Just when it looked like the deal might finally close, the states stepped up pressure and Illinois joined a multistate lawsuit aimed at stopping the merger.
Two of the four deals I was participating in (Red Hat and Finisar) closed last quarter and I started a new position in Mellanox Technologies (MLNX) after writing about it for premium members.
Voluntary Disclosure: I hold long positions in Pacific Biosciences of California (PACB) and Mellanox Technologies (MLNX).