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Exiting Our Activision Blizzard Position – Merger Arbitrage Mondays

  • July 3, 2023

Key Highlights

  • Microsoft (MSFT), Activision Blizzard (ATVI), and the FTC fight it out in court.
  • CIRCOR International (CIR) in the midst of a bidding war.
  • UnitedHealth Group Incorporated (UNH) wins the bidding war for Amedisys (AMED).

Exiting Our Activision Blizzard Position:

We have covered Microsoft’s acquisition of Activision Blizzard (ATVI) for several months here on InsideArbitrage including our original write-up in the October 2022 Special Situations Newsletter and a detailed follow-up by Frank Moneymaker in our January 2023 newsletter.

While I had followed Activision Blizzard for more than fifteen years before the deal was announced, I did not get interested in participating in the merger arbitrage situation until the price had dropped to around $75 and we initiated a position in the InsideArbitrage model portfolio at a price of $74.34. I also subsequently purchased the stock for my personal portfolio.

My rationale at that time was that there was a 67% probability of the deal going through with $20 of upside to the $95 deal price and a potential $10 downside if the deal did not go through. I concluded my October 2022 as follows:

Activision’s CEO Bobby Kotick told employees in a letter, that he still expects the deal to close in Microsoft’s fiscal year ending in June 2023 and Microsoft’s CEO Satya Nadella said he’s confident the company can gain regulatory approval for its purchase of Activision Blizzard even in the face of an in-depth regulatory probe in the UK.

Activision is keen on this deal closing to help with its employee culture issues and Microsoft wants this deal to help cement its leadership in the gaming industry, especially if Meta succeeds in its quest to build a social virtual world.

June 2023 has come and passed and while the stock is up to nearly $85, Microsoft is now in a battle with both the FTC and U.K.’s CMA. As various events transpired during the last eight months, I mentally updated my probability of deal closure. At this juncture, I think the probability of the deal closing is about 60%. However the upside from here is a little more than $10, while the downside is almost $20 assuming the stock drops to $65 in case of a deal break.

I attempted to model the intrinsic value of Activision Blizzard using a DCF model and accounted for the cash the company already holds on its balance sheet as well as the $3 billion in cash it would receive in case of a deal break. I believe the intrinsic value lies somewhere between $65 and $75 per share despite the strong performance of their Diablo IV game.

Just like the acquisition of Change Healthcare by UnitedHealth Group (UNH) where UnitedHealth was successful in challenging the DOJ in court and closed the deal, it is possible that Microsoft will also persevere in its battle with the FTC. The following section that discusses the court proceedings provides additional insight into how the case is proceeding. However given the risk/reward of the position, I have decided to exit and sell our position for a gain of 13.4% in the model portfolio.

Court Proceedings:

Microsoft (MSFT) and Activision Blizzard (ATVI) recently completed their five-day court proceedings in San Francisco, where the Federal Trade Commission aimed to halt their acquisition. Several interesting facts came to light during the trial.

The trial revealed not just details about games, but also shed light on Microsoft’s business ambitions, its acquisition approval process, and its key competitors in the cybersecurity sector.

The FTC had initially planned to present its case before an administrative law judge in August but later opted for a different approach, pursuing a preliminary injunction in federal court. The reason for this shift was the FTC’s concern that Microsoft might try to complete the acquisition before obtaining clearance in specific jurisdictions.

Not only are regulators in the U.S. and the United Kingdom opposed to the deal, but Sony, whose PlayStation 5 console competes with Microsoft’s Xbox Series S and X consoles, also opposes the acquisition, expressing concerns about potential anticompetitive effects that would arise if Microsoft were to gain control of Activision Blizzard.

Here are some noteworthy facts that have emerged in recent days and are still relevant after both parties presented their closing arguments on Thursday.

  • Microsoft’s interest in mobile gaming and expanding its presence on mobile devices played a role in the Activision acquisition.
  • Before choosing Activision Blizzard, Microsoft considered other companies like Zynga, Niantic, Sega Sammy, and Square Enix.
  • Microsoft aims to gain market relevance in Japan through acquisitions, as Xbox consoles have lower popularity compared to Nintendo and Sony.
  • Sony has paid game developers to discourage them from releasing games on Xbox.
  • The hearing revealed negotiations regarding the availability of Activision Blizzard games on PlayStation consoles after the acquisition.
  • Microsoft CEO Satya Nadella has ambitious financial goals for the company, aiming for $500 billion in revenue by 2030.
  • Microsoft faced challenges in accessing Sony’s development kits, affecting game optimization for Minecraft on PlayStation.
  • Negotiations between Microsoft and Activision Blizzard involved revenue sharing and the availability of Call of Duty games on Xbox consoles.
  • Sony’s CEO expressed concerns about the availability of Activision Blizzard games on PlayStation after the transaction.
  • Activision Blizzard’s CEO, Bobby Kotick, made a mistake in underestimating the success of the Nintendo Switch console.
  • Activision Blizzard considered but ultimately rejected offering games on Microsoft’s Game Pass subscription service.
  • Microsoft has provided access to Call of Duty games for smaller cloud gaming players but not to Amazon’s Luna service, one of its major cloud computing competitors.
  • Microsoft’s cloud-based streaming option has not gained significant traction and remains unprofitable.
  • Azure’s growth is a closely watched metric for Microsoft investors, although the company does not disclose Azure revenue in dollars.
  • Microsoft tracks its cybersecurity performance using metrics related to Okta, CrowdStrike, Proofpoint, and Symantec.
  • Microsoft argued that it would keep Call of Duty on PlayStation and expand availability on multiple cloud streaming services, but discussions showed considerations of reducing availability on PlayStation.
  • Microsoft explored scenarios where lower sales of Activision Blizzard games on PlayStation could be compensated by increased Xbox and Game Pass sales.

The Bidding War for CIRCOR International (CIR)

On June 28, 2023, private equity firm Arcline Investment Management made a cash offer of $57 per share to acquire Circor International, surpassing a competing bid from KKR & Co.

KKR stated that the potential deal poses no antitrust risks due to the absence of competitive overlap, causing Circor’s shares to reach a five-year high of $54.94.

CIRCOR International revised its merger agreement with KKR on June 29, 2023. The amended agreement offers CIRCOR stockholders $56.00 per share in cash, which is a 9.8% increase over KKR’s previous bid of $51.00 per share on June 26, 2023. In addition to the cash consideration, CIRCOR stockholders may receive extra cash from KKR if the transaction is not completed by October 31, 2023, subject to certain conditions. The additional cash, known as a “ticking fee,” has a maximum aggregate amount of $1 per share and accrues on a prorated daily basis between November 1, 2023, and December 31, 2023.

UnitedHealth (UNH) wins the bidding war for for Amedisys (AMED)

United Health (UNH) outbid Option Care’s (OPCH) offer to buy Amedisys (AMED) on Monday, June 26, 2023.

In an effort to strengthen its position in the industry, UnitedHealth is pursuing its second home healthcare acquisition of the year by acquiring Amedisys. This follows its earlier acquisition of Amedisys’ rival, LHC Group in February.

The deal involves the acquisition of Amedisys’ common stock for $101 per share in cash and places Amedisys under the Optum arm of UnitedHealth. Through this acquisition, UnitedHealth expects to expand its presence in the post-acute space.

UnitedHealth’s all-cash offer proved more enticing than Option Care Health’s all-stock transaction, which was valued at $97.38 per share, prompting Amedisys to choose UnitedHealth’s proposal instead.

Other prominent organizations have succumbed to the appeal of home-based health care.

CVS Health (CVS) emerged as the winner in the acquisition of Signify Health for $8 billion in March, earlier this year, outbidding UnitedHealth Group (UNH) and Amazon (AMZN). Walgreens Boots Alliance (WBA) recently acquired the remaining 45% stake of CareCentrix, a home care company, for approximately $392 million.

The acquisition of Amedisys by UnitedHealth serves as a clear indication of the expanding significance of home-based care in the healthcare industry.


Merger Arbitrage activity decreased last week with three new deals announced, five deals closing and one deal terminated.

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 202389
Total Number of Deals Not Completed in 20236
Total Number of Pending Deals
Cash Deals41
Stock Deals16
Stock & Cash Deals4
Special Conditions6
Total Number of Pending Deals67
Aggregate Deal Consideration$698.59 billion

New Merger Arbitrage Deals:

  1. The acquisition of Amedisys, Inc. (AMED) by UnitedHealth Group Incorporated (UNH) for $3.8 billion or $101 per share in cash. potential dealWe added AMED as a to the Deals in the Works section on June 5, 2023, and the price after the news of the potential deal came out was $91.74.
  2. The acquisition of Kaleyra (KLR) by Tata Communications Limited for $316.2 million or $7.25 per share in cash.
  3. The acquisition of Sigilon Therapeutics (SGTX) by Eli Lilly and Company (LLY) for $34.6 million or $14.92 per share in cash plus one non-tradeable contingent value right (“CVR”) per share that entitles the holder to receive up to an additional $111.64 per share in cash, for a total potential consideration of up to $126.56 per share in cash without interest.

Deal Amended:

  1. On June 27, 2023, CIRCOR International (CIR) announced that it has accepted a proposal from KKR to increase the price of its previously announced definitive merger agreement with CIRCOR from $49 to $51 per common share in cash, an increase of $2 per share. The all-cash transaction will be valued at $1.7 billion, including the assumption of debt.
  2. June 28, 2023: According to Reuters, Arcline Investment Management, a private-equity firm, has put forward a cash offer to acquire Circor International (CIR) at a price of $57 per share. This proposal surpasses a competing bid from KKR & Co (KKR) by an additional $6. The new offer follows Circor International’s rejection of a bid from an undisclosed bidder, opting instead to enter into a $1.7 billion agreement with KKR.
  3. On June 29, 2023, CIRCOR International (CIRamended its definitive merger agreement with KKR to acquire the company for $56.00 per share in cash, an increase of 9.8% over KKR’s bid of $51.00 per share on June 26, 2023. Under the terms of the Amended Agreement, in addition to receiving $56.00 per share, CIRCOR stockholders will, subject to certain conditions, receive additional cash consideration from KKR if the transaction has not closed by October 31, 2023. The maximum aggregate amount of the “ticking fee” would be $1 per share, with the actual amount accruing on a prorated daily basis between November 1, 2023, and December 31, 2023.

Deal Updates:

  1. IVERIC bio (ISEE) announced that the required waiting period under the HSR Act with respect to the merger with Astellas Pharma expired on June 23, 2023.
  2. Silicon Motion (SIMO) and MaxLinear (MXL) previously filed under the HSR Act, and the HSR Waiting Period expired on June 27, 2022. However, since the Merger was not consummated by June 27, 2023, clearance under the HSR Act expired and on June 28, 2023, MaxLinear and Silicon Motion re-filed under the HSR Act.
  3. On June 28, 2023, Mr. Cooper Group (COOPextended the expiration date of its offer to acquire Home Point Capital (HMPT) from June 27, 2023, to July 21, 2023.
  4. On June 29, 2023, Ironwood Pharmaceuticals (IRWD) and VectivBio Holding AG (VECT) announced the successful completion of the tender offer.
  5. On June 29, 2023, IVERIC bio (ISEE) announced that with the expiration of the HSR waiting period, the transaction is anticipated to conclude on July 11th, three business days after the stockholder meeting scheduled for July 6th, provided that the merger receives the necessary affirmative vote from the stockholders and all other closing conditions are met.
  6. Chevron (CVX) and PDC Energy (PDCE) each filed their respective requisite notification and report forms under the HSR Act on June 5, 2023.
  7. Eli Lilly and Company (LLYlaunched its tender offer to acquire DICE Therapeutics (DICE). The offer is expected to expire on July 28, 2023.
  8. Paratek Pharmaceuticals (PRTK) and Gurnet Point Capital filed their requisite notification and report forms under the HSR Act with the DOJ and FTC on June 21, 2023. The applicable waiting period will expire on July 21, 2023.
  9. On June 30, 2023, Greenhill (GHL) and Mizuho Americas filed their notifications required under the HSR Act on June 6, 2023, and the initial 30-day waiting period is scheduled to expire on July 6, 2023.

Approvals:

  1. On June 26, 2023, Qualtrics International (XM) received all regulatory approvals or clearances required in connection with the previously announced merger with Silver Lake, representing the last of the closing conditions under the Merger Agreement to be satisfied. The company expects the merger to close on June 28, 2023.
  2. On June 26, 2023,  VectivBio Holding AG (VECT) announced that it has received shareholder approval to be acquired by Ironwood Pharmaceuticals (IRWD).
  3. On June 26, 2023, Magellan (MMP) and ONEOK (OKEannounced the expiration of the waiting period under the HSR Act.
  4. On June 29, 2023, National Instruments Corporation (NATI) announced that at NI’s stockholders voted to adopt the proposed Agreement and Plan of Merger, whereby NI will be acquired by Emerson (EMR).
  5. On June 29, 2023, U.S. Xpress Enterprises (USX) announced that it has received shareholder approval to be acquired by Knight-Swift Transportation Holdings (KNX).
  6. On June 29, 2023, Absolute Software Corporation (ABST) announced that its security holders have approved the acquisition of the company by Crosspoint Capital Partners, L.P.

Hurdles:

  1. On June 29, 2023, a UK court has rejected the request made by the antitrust regulator of the country to postpone a hearing regarding Microsoft’s (MSFTappeal against the regulatory body’s decision to block its $69 billion acquisition of Activision (ATVI).
  2. June 29, 2023: According to Reuters, the FTC has expressed concerns that should Microsoft (MSFT) acquire Activision (ATVI), it would possess both the motive and capability to potentially impede competition in markets associated with consoles, subscription game services, and cloud gaming.
  3. On June 29, 2023, Flat Footed LLC, a top shareholder of Diversified Healthcare Trust (DHC) and the owner of approximately 9.8% of the outstanding common shares of the company, announced that it has filed a definitive proxy statement with the SEC and sent a letter to shareholders in connection with its opposition to the company’s proposed merger with Office Properties Income Trust (OPI).
  4. June 30, 2023: According to Bloomberg, the FTC’s chances of holding up Microsoft’s (MSFT) $69 billion bid to buy Activision Blizzard (ATVIappeared uncertain after a federal judge challenged the agency’s argument that the proposed transaction would hurt gamers.

Shareholders Meeting Schedule:

  1. Embark Technology (EMBK) – July 17, 2023
  2. Berkshire Grey (BGRY) – July 18, 2023
  3. Syneos Health (SYNH) – August 2, 2023
  4. PDC Energy (PDCE) – August 8, 2023
  5. Apexigen (APGN) – August 22, 2023

Closed Deals:

  1. The acquisition of CTI BioPharma Corp. (CTIC) by Swedish Orphan Biovitrum AB on June 26, 2023. It took 47 days for this deal to be completed.
  2. The acquisition of Qualtrics International (XM) by Silver Lake and CPP Investments on June 28, 2023. It took 107 days for this deal to be completed.
  3. The acquisition of BELLUS Health (BLU) by GSK plc (GSK) on June 28, 2023. It took 71 days for this deal to be completed.
  4. The acquisition of INDUS Realty Trust (INDT) by Centerbridge Partners, L.P. on June 29, 2023. It took 127 days for this deal to be completed.
  5. The acquisition of The Community Financial Corporation (TCFC) by Shore Bancshares (SHBI) on July 1, 2023. It took 199 days for this deal to be completed.

Terminated Deal:

  1. Amedisys (AMED) terminated its previous agreement with Option Care Health (OPCH) and entered into a definitive agreement to be acquired by UnitedHealth Group Incorporated (UNH).

Weekly Spread Changes:

The table below shows weekly spread changes between June 23, 2023, and June 30, 2023.

SymbolQuoteAcquiring
Company
Acquiring
Company Quote
Current
Spread
Last Week
Spread
Spread Change
Weekly
Deal
Type
DM1.77Stratasys Ltd. (SSYS)17.7623.42%4.61%18.81%All Stock
INFI0.2105MEI Pharma, Inc. (MEIP)6.5862.55%58.40%4.15%All Stock
TSEM37.52Intel Corporation (INTC)33.4441.26%37.50%3.76%All Cash
SGEN192.46Pfizer Inc. (PFE)36.6818.99%15.53%3.46%All Cash
NGMS26.12Aristocrat Leisure Limited (ALL.AX)38.6612.94%10.20%2.74%All Cash
BKI59.73Intercontinental Exchange, Inc. (ICE)113.0826.76%32.59%-5.83%Cash Plus Stock
IRBT45.25Amazon (AMZN)130.3634.81%40.65%-5.84%All Cash
SURF0.8696Coherus BioSciences, Inc. (CHRS)4.2726.49%32.53%-6.04%Special Conditions
WWE108.47Endeavor Group Holdings, Inc. (EDR)23.92-2.28%5.15%-7.43%Special Conditions
SAVE17.16JetBlue Airways Corporation (JBLU)8.8680.65%91.59%-10.94%All Cash

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$17.1606/30/202480.65%80.87%
INFI02/23/2023MEI Pharma, Inc. (MEIP)$0.34$0.210509/30/202362.55%253.66%
SIMO05/05/2022MaxLinear, Inc. (MXL)$105.79$71.8608/07/202347.21%478.66%
TSEM02/15/2022Intel Corporation (INTC)$53.00$37.5208/15/202341.26%342.25%
IRBT08/05/2022Amazon (AMZN)$61.00$45.2508/05/202334.81%373.66%
BKI05/04/2022Intercontinental Exchange, Inc. (ICE)$75.71$59.7308/04/202326.76%295.95%
SURF06/16/2023Coherus BioSciences, Inc. (CHRS)$1.10$0.869609/30/202326.49%107.45%
ACI10/14/2022The Kroger Co. (KR)$27.25$21.8203/31/202424.89%33.27%
DM05/25/2023Stratasys Ltd. (SSYS)$2.18$1.770012/31/202323.42%46.96%
SGEN03/13/2023Pfizer Inc. (PFE)$229.00$192.4601/31/202418.99%32.53%

Deals In The Works

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

  1. June 25, 2023: According to a regulatory filing, Whole Earth Brands Inc.’s (FREE) largest shareholder, Martin Franklin, has submitted a non-binding proposal of $4 per share in cash to acquire the rest of the company.
  2. June 26, 2023: According to Bloomberg, Canadian investment giant Brookfield Reinsurance arm (BNRE) is nearing a deal to acquire insurance firm American Equity Investment Life Holding (AEL).
  3. June 26, 2023: According to Reuters, Software company Enfusion (ENFN) is attracting takeover interest from private equity firms and strategic buyers.
  4. On June 29, 2023, Carriage Services (CSV) announced that its Board of Directors has initiated a process to explore potential strategic alternatives, possibly including a sale, merger, or other potential strategic or financial transaction, to maximize shareholder value.
  5. On June 29, 2023, Aurinia Pharmaceuticals (AUPH) announced that its Board of Directors has initiated an exploration of strategic alternatives.

Updates

  1. Mercury Systems (MRCY) announces the conclusion of its strategic review
  2. Abcam (ABCM) announced after engaging with shareholders the company has decided to explore strategic alternatives including a potential sale.
  3. LL Flooring (LL) rejects a non-binding proposal from Cabinets To Go for $5.76 per share in cash.
  4. Abcam (ABCM) founder Jonathan Milner announces suspension of proxy solicitation to allow Abcam’s Board of Directors to run a comprehensive review of strategic alternatives.
  5. 3D Systems (DDD) submits an enhanced proposal to the Board of Directors of Stratasys (SSYS) to combine the two companies in a cash and stock transaction that would convert each Stratasys ordinary share into $7.50 in cash and 1.3223 newly issued shares of 3D Systems common stock.
  6. Root (ROOT) announces that it hasn’t received an actionable proposal.
  7. The Donerail Group urges Stratasys (SSYS) to negotiate a deal with 3D Systems (DDD) and terminate its planned merger with Desktop Metal (DM)

SPAC Arbitrage

SPAC IPO

  1. On June 27, 2023, Bukit Jalil Global Acquisition 1 Ltd. announces the pricing of $50.0 million IPO.

SPAC Business Combination

  1. On June 20, 2023, Cetus Capital Acquisition Corp. (CETUentered into a business combination agreement with MKD Technology Inc.
  2. On June 23, 2023, Bannix Acquisition Corp. (BNIX) and EVIE Autonomous Group Ltd entered into a Business Combination Agreement.
  3. On June 26, 2023, Baird Medical Investment Holdings Limited and ExcelFin Acquisition Corp. (XFINentered into a definitive business combination agreement that would result in Baird Medical becoming a publicly traded company.
  4. On June 29, 2023, Semper Paratus Acquisition Corporation (LGST) and Tevogen Bio Inc. announced the execution of a merger agreement.

Terminated

  1. On June 21, 2023, EdtechX Holdings Acquisition Corp. II (EDTXterminated its business combination with zSpace, Inc.
  2. On June 26, 2023, TKB Critical Technologies 1 (USCTterminated its business combination with Wejo Group Limited (WEJO).
  3. On June 26, 2023, Kairous Acquisition Corp. Limited (KACL) announced that its business combination with nutrition company Wellous has been mutually terminated.
  4. On June 28, 2023, Stratim Cloud Acquisition Corp. (SCAQ) and Force Pressure Control mutually terminated their business combination agreement.
  5. On June 30, 2023, HH&L Acquisition Co. (HHLA) announced that it has terminated its business combination with biotech firm DiaCarta.

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.