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European Union Launches Probe into Amazon’s Acquisition of iRobot – Merger Arbitrage Mondays

  • June 26, 2023

Key Highlights

    1. Amazon’s (AMZN) plan to buy iRobot (IRBT) is headed for an in-depth European Union probe.
    2. The FTC pressures Microsoft (MSFT) to halt its acquisition of Activision Blizzard (ATVI) through the enforcement of an injunction – U.S. court hearing begins.
    3. DICE Therapeutics (DICE) enters into a definitive agreement to be acquired by Eli Lilly (LLY).

European Union Initiates In-Depth Investigation into Amazon’s (AMZN) Planned Acquisition of iRobot (IRBT)

Following Amazon’s initial announcement of its potential acquisition of iRobot, the company obtained approval from regulators in the United Kingdom on June 16, causing shares of the Roomba-manufacturer to rocket over 20%. The spread on the deal, which had last month expanded to more than 90%, collapsed to just under 20% ten days ago.

iRobot Spread History

The deal, however is facing potential scrutiny from the European Union. According to Reuters, the European Union is preparing to launch a comprehensive four-month investigation into Amazon’s proposed buyout. The spread once again expanded to over 40%.

Highlighting the highly competitive nature of the vacuum cleaner market, Amazon has cited the presence of numerous Chinese companies offering products in this space. In a similar vein, the UK Competition and Market Authority (CMA) shares Amazon’s perspective, asserting that it does not foresee the company causing any disadvantage to other manufacturers of robot vacuum cleaners.

As the EU gears up to conduct a thorough investigation, the outcome of this inquiry will impact the future trajectory of Amazon’s proposed acquisitions. In our January 2023 mid-month update titled, iRobot Arbitrage Opportunity, we covered Amazon’s acquisition of iRobot in more detail.

Here are a few highlights from that article:

The proposed merger between Amazon.com Inc. (AMZN) and iRobot Corp (IRBT) is one of the most contentious deals outstanding.Amazon announced its intentions to acquire iRobot in early August for $61.00 per share, valuing the home robotics company at $1.7 billion. The deal makes excellent strategic sense for the company, which has been busy buying/building its home IoT tech stack over the past last decade (think Ring, Alexa, Blink, and Eero). There are tremendous big data advantages involved in integrating iRobot’s home mapping information with Ring’s front lawn views, Amazon.com’s shopping cart tracking, and Alexa’s frequently asked questions, as this proprietary data allows the company to better tailor its advertising and strengthen its hold on the home IoT market (by introducing higher switching costs).

IRBT’s shareholders have already voted to approve the deal, and the financing will be paid out of Amazon’s $36 billion war chest. The remaining deal risk lies solely on the shoulders of regulators, who have been quite outspoken against Big Tech consolidation. The FTC, European Commission, and the UK’s Competition and Markets Authority (CMA) will determine the fate of this deal and help lay the groundwork for future competition law enforcement.

What Are Regulators Saying?

There has been a tremendous push in recent years toward better-protecting data privacy in the US. Federal lawmakers, state lawmakers, and government agencies (like the FTC) have moved to establish frameworks to provide data security for their consumers. For example, the Lina Khan-led FTC has made it clear that they are focusing on consumer data protection. Just six days after Amazon announced its acquisition, the FTC released a notice stating:

“The Federal Trade Commission today announced it is exploring rules to crack down on harmful commercial surveillance and lax data security”

Additionally, the FTC has outstanding lawsuits against both Facebook and Meta – and is also investigating Amazon regarding subscription policy concerns. While the ability to block deals over data protection concerns is still a gray area, the tea leaves are clearly showing a growing risk to deals where consumer data (like a map of users’ homes) is at stake.

This wildcard aspect of the regulatory approval process alone is daunting, but the FTC is also targeting the deal based on anti-competitive concerns.

Due to Amazon’s existing presence in the smart home industry and iRobot’s dominant market positioning, the acquisition appears part of a broader process to put a stranglehold on the industry. For context, iRobot controls 75% of the market by revenue and is highly complementary to Amazon’s existing smart home portfolio (i.e. Ring, which accounts for 40% of video doorbells in the US, Blink, and Euro). Through these devices, Amazon has successfully created a flywheel ecosystem, anchored by Amazon Prime and Alexa, which causes bolt-on acquisitions to further insulate the company from competitors.

By controlling IRBT, Amazon could use its copy-acquire-kill playbook to stamp out remaining competitors. Amazon is “basically taking out their largest competition in a market they want to dominate,” said Sarah Miller, executive director of the anti-monopoly advocacy group American Economic Liberties Project.

While vertical mergers and conglomerate mergers are not typically concerns for regulators, the tides of merger controls appear to be changing, and the interrelated issues brought about by Big Tech data leveraging and Amazon’s integrated tech ecosystem, and its track record of anticompetitive M&A practices may win out in court.

The European Commission and UK’s CMA have yet to weigh in on the matter, but these agencies are arguably more hostile to Big Tech than the FTC. In fact, the CMA recently updated its Merger Assessment Guidelines (MAGs) to deal with this type of situation – it also requested additional authority to tackle Big Tech mergers, citing concerns that digital mergers have been underenforced and that vertical mergers have rarely been challenged.

Given our opinion of an extended deal review by regulators, we decided that selling options could be used to play potential extensions of the deal deadline and wrote the following:

As mentioned, the deal has outside dates in August 2022, February 2023, and August 2024. Deals under an extended regulatory review often take years to close, and selling options can provide compelling returns if you are comfortable playing the merger timing. For example, writing a hypothetical June 2023 $55 call provides a 10.5% IRR.


Merger Arbitrage activity increased last week with four new deals announced and one deal closing.

You can find all the active deals listed below in our Merger Arbitrage Tool (MAT) which automatically updates itself during market hours.

Merger Arbitrage

Deal Statistics:

Total Number of Deals Closed in 202384
Total Number of Deals Not Completed in 20235
Total Number of Pending Deals
Cash Deals43
Stock Deals18
Stock & Cash Deals4
Special Conditions5
Total Number of Pending Deals70
Aggregate Deal Consideration$698.04 billion

New Merger Arbitrage Deals:

  1. The acquisition of DICE Therapeutics (DICE) by Eli Lilly and Company (LLY) for $2.4 billion or $48 per share in cash.
  2. The acquisition of Quotient Technology (QUOT) by Neptune Retail Solutions for $430 million or $4.00 per share in cash. We added QUOT as a potential deal to the Deals in the Works section on March 7, 2023, and the price after the news of the potential deal came out was $3.62.
  3. The acquisition of Surface Oncology (SURF) by Coherus BioSciences (CHRS) for $65 million in an all stock deal. Under the terms of the agreement, shareholders of Surface Oncology will receive 0.29 shares of Coherus for each Surface Oncology share. Surface shareholders will also receive CVRs based on potential future payments for previously partnered assets and for potential ex-US licensing. We are adding this as a special conditions deal with a $1.10 price without the CVR.
  4. The acquisition of Conformis (CFMS) by restor3d for a negative enterprise value or $2.27 per share in cash.

Deal Updates:

  1. On June 20, 2023, ONEOK (OKE) and Magellan (MMPsubmitted the required notification and furnished information to the FTC and the DOJ and the HSR Act waiting period will expire on June 26, 2023.
  2. On June 20, 2023, eMagin Corporation (EMAN) by Samsung Display filed the requisite notification forms under the HSR Act with the DOJ and the FTC on June 1, 2023. The waiting period under the HSR Act expires on July 3, 2023.
  3. On June 20, 2023, PNM Resources (PNM) and Avangrid (AGR) mutually agreed to an amendment and extension of their merger agreement through December 31, 2023. The agreement can be further extended by three months upon mutual agreement from the companies.
  4. On June 22, 2023, Absolute Software (ABST) announced that Institutional Shareholder Services (“ISS”) and Glass Lewis & Co., have recommended Absolute shareholders to vote FOR the plan of arrangement with Crosspoint Capital Partners.
  5. On June 23, 2023, Necessity Retail REIT (RTLannounced the expiration of the 30-day “Go-Shop” period set forth in the previously announced definitive merger agreement with Global Net Lease (GNL).
  6. National Instruments Corporation (NATI) announced that the waiting period under the HSR Act expired on May 26, 2023.
  7. On June 24, 2023, Swedish Orphan Biovitrum AB announced that it has completed its tender offer to purchase all outstanding shares of common stock of CTI BioPharma (CTIC). Sobi expects to complete the acquisition of CTI on June 26, 2023.

Approvals:

  1. On June 19, 2023, HEXO Corp. (HEXO) announced that the Ontario Superior Court of Justice has granted the final order in connection with the previously announced statutory plan of arrangement, pursuant to which Tilray Brand will acquire the company.
  2. On June 20, 2023, The Community Financial Corporation (TCFC) and Shore Bancshares (SHBI) announced that their shareholders approved the previously announced merger. The transaction is expected to be completed on July 1, 2023.
  3. On June 21, 2023, Amedisys (AMED) and Option Care Health (OPCH) announced that the applicable waiting period with respect to the Merger under the HSR Act, expired on June 16, 2023.
  4. On June 22, 2023, LINKBANCORP (LNKB) and Partners Bancorp (PTRS) announced that their shareholders approved the merger of Partners with and into LINK.
  5. On June 22, 2023, INDUS Realty Trust (INDTreceived written notice from the CFIUS that it has concluded its review and cleared the transaction with Centerbridge Partners.

Hurdles:

  1. On June 20, 2023,  The U.S. Chamber of Commerce said L3Harris Technologies’ (LHX) planned acquisition of Aerojet Rocketdyne (AJRDshouldn’t be blocked on antitrust grounds.
  2. On June 22, 2023: According to the Reuters, the FTC will argue in federal court for a preliminary injunction to temporarily block Microsoft’s (MSFT) acquisition of Activision Blizzard (ATVI), stopping the deal from closing before the government’s case against the deal is heard. The administrative hearing within the FTC is set to begin on August 2, 2023.
  3. June 22, 2023: According to The Wall Street Journal, Microsoft (MSFTsquared off against the FTC on Thursday with the beginning of a closely watched hearing that could decide the fate of one of tech’s largest-ever acquisitions.
  4. June 22, 2023: According to Bloomberg, Amazon’s (AMZN) plan to buy iRobot (IRBT) is headed for an in-depth European Union probe unless the e-commerce firm makes an immediate offer that allays antitrust concerns.
  5. On June 22, 2023, Reuters reported that the states of California, Minnesota, and Wisconsin on Thursday joined an FTC lawsuit to stop Amgen’s (AMGN) deal to buy Horizon Therapeutics (HZNP), according to a court filing.
  6. On June 23, 2023, the FTC filed its lawsuit with the in-house Administrative Law Judge to block Amgen’s (AMGN) planned acquisition of Horizon Therapeutics (HZNP).
  7. June 23, 2023: According to Bloomberg, a Microsoft (MSFT) executive vowed in court that after the company’s acquisition of Activision Blizzard (ATVI), Call of Duty will remain available on rival Sony’s PlayStation devices, countering the US FTC’s claim that the purchase would thwart competition in the console gaming market.

Shareholders Meeting Schedule:

  1. NeoGames (NGMS) – July 18, 2023
  2. Midwest Holding (MDWT) – July 26, 2023

Closed Deals:

  1. The acquisition of Ranger Oil Corporation (ROCC) by Baytex Energy Corp. (BTE) on June 20, 2023. It took 112 days for this deal to be completed.
  2. The acquisition of HEXO Corp. (HEXO) by Tilray Brands (TLRY) on June 22, 2023. It took 73 days for this deal to be completed.

Weekly Spread Changes:

The table below shows weekly spread changes between June 16, 2023, and June 23, 2023.

SymbolQuoteAcquiring
Company
Acquiring
Company Quote
Current
Spread
Last Week
Spread
Spread Change
Weekly
Deal
Type
IRBT43.37Amazon (AMZN)129.3340.65%19.61%21.04%All Cash
SAVE16.18JetBlue Airways Corporation (JBLU)7.9491.59%82.78%8.81%All Cash
TSEM38.545Intel Corporation (INTC)3337.50%28.73%8.77%All Cash
DHC1.98Office Properties Income Trust (OPI)7.15-46.92%-52.98%6.06%All Stock
PNM44.98Avangrid, Inc. (AGR)37.1911.83%8.97%2.86%All Cash
MMP59.48ONEOK, Inc. (OKE)57.696.72%9.24%-2.52%Cash Plus Stock
EMAN2.03Samsung Display Co., Ltd. (N/A)2.46%6.12%-3.66%All Cash
AAIC4.29Ellington Financial Inc. (EFC)13.312.20%16.22%-4.02%All Stock
LBC9.07Washington Federal, Inc. (WAFD)26.3-2.77%1.54%-4.31%All Stock
SIMO72.13MaxLinear, Inc. (MXL)28.9445.25%50.63%-5.38%Cash Plus Stock

Top 10 Merger Arbitrage Deals With The Largest Spreads:

Please do your own due diligence on deals with large spreads. Some of these large spreads might be related to regulatory issues or because of the way the deal is structured. We classify some of these deals as “special situation” deals in our merger arbitrage tool and provide additional details to help with the analysis. There may be unique situations related to special dividends, spinoffs, proration, etc. that need to be accounted for when looking at these spreads.

SymbolAnnounced
Date
Acquiring
Company
Closing
Price
Last
Price
Closing
Date
ProfitAnnualized
Profit
SAVE07/28/2022JetBlue Airways Corporation (JBLU)$31.00$16.1806/30/202491.59%90.11%
INFI02/23/2023MEI Pharma, Inc. (MEIP)$0.34$0.21706/30/202358.40%4262.93%
SIMO05/05/2022MaxLinear, Inc. (MXL)$104.77$72.1306/30/202345.25%3303.24%
IRBT08/05/2022Amazon (AMZN)$61.00$43.3708/05/202340.65%361.89%
TSEM02/15/2022Intel Corporation (INTC)$53.00$38.54508/15/202337.50%268.39%
BKI05/04/2022Intercontinental Exchange, Inc. (ICE)$75.58$5708/04/202332.59%297.38%
SURF06/16/2023Coherus BioSciences, Inc. (CHRS)$1.10$0.8309/30/202332.53%122.41%
ACI10/14/2022The Kroger Co. (KR)$27.25$21.4603/31/202426.98%35.17%
FORG10/11/2022Thoma Bravo (N/A)$23.25$19.5606/30/202318.87%1377.15%
ATVI01/18/2022Microsoft Corporation (MSFT)$95.00$81.9006/30/202316.00%1167.64%

Deals In The Works

Two new potential Merger Arbitrage deals were added to the ‘Deals In The Works‘ section last week.

  1. On June 20, 2023, Reuters reported that NV5 Global (NVEE) a U.S. engineering consultant is exploring a sale.
  2. On June 21, 2023, The Wall Street Journal reported that Embedded Insurance has approached Root (ROOT) multiple times and offered $19.34 a share.

Updates

  1. Stratasys (SSYS) responds to 3D that the buyout bid from 3D Systems (DDD) is not superior to its planned acquisition of Desktop Metal (DM). In response to the Stratasys update, 3D Systems affirms its commitment to pursuing a combination with Stratasys (SSYS).

SPAC Arbitrage

Potential SPAC IPO

  1. On June 21, 2023, Nabors Energy Transition Corp. II (NTED) filed for a $300 million IPO.

SPAC Business Combination

  1. On June 22, 2023, TLGY Acquisition Corporation (TLGY) and Verde Bioresins, Inc. entered into a definitive business combination agreement.
  2. On June 23, 2023, Pinstripes announced its plan to go public via a business combination with Banyan Acquisition Corp. (BYN).

Completed

  1. On June 20, 2023, Drilling Tools International Holdings, Inc. completed its business combination with ROC Energy Acquisition Corp. (ROC). The combined company will operate under the name Drilling Tools International Corp. (DTI).

Terminated

  1. On June 22, 2023, Minority Equality Opportunities (MEOA) announced that it has terminated its combination with cloud services firm Digerati (OTCQB:DTGI).
  2. On June 22, 2023, Tastemaker Acquisition Corp. (TMKR) announced that it has terminated its combination with jewelry distributor Quality Gold.

List of all pending Merger Arbitrage deals:

Disclaimer: I have long positions in Activision Blizzard (ATVI), Spirit Airlines (SAVE) and Tower Semiconductor (TSEM). Please do your own due diligence before buying or selling any securities mentioned in this article. We do not warrant the completeness or accuracy of the content or data provided in this article.