Current Merger Arbitrage Spreads, M&A Deals

11/21/08

As I said in my last post, ,Make Money On Mergers and Acquisitions, I will be presenting some merger arbitrage spreads. Merger arbitrage (even though not true arbitrage) is the term given to the potential opportunity of making money on the premium paid to the target company by owning stocks of the target (seller) in an acquisition.

The area you can make money in is the difference between the current stock price and the buyer's purchase price (if cash deal). It must be paid in cash, because in this market if a buyer offers a stock for stock deal, then the buyer's stock price is likely to fluctuate. That can eliminate the premium if the buyer's stock price drops significantly.

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Here's a list of likely Mergers / Acquisitions:

>Constellation Energy Group (CEG )- in September this energy giant accepted an offer from Warren Buffett's MidAmerican Energy Holdings for $4.73 billion. Constellation filed for a shareholder proxy to vote in favor of the acquisition.
Premium offered: 13.2% or $3.10
Cash offered per share: $26.50
CEG current price: $23.40
Expected closing: within 7 months

>Rohm & Haas Co. (ROH)- to be bought by Dow Chemical Company (DOW).
Premium offered: 9% or $6.45
Cash offered per share: $78.00
ROH current price: $71.55
Expected closing: Jan. 2009/ Very early 2009

>Foundry Networks Inc. (FDRY)- to be acquired by Brocade Communications Systems Inc. (BRCD) for $2.6 billion.
Premium offered: 10.59% or $1.58
Cash offered per share: $16.50 cash
FDRY current price: $14.92
Expected closing: Fourth quarter 2008

>Puget Energy Inc. (PSD)- this deal is pending Macquarie Bank's ability to borrow $7.4 billion, which is not easy in these rough economic times.
Premium offered: 15.25% or $3.97
Cash offered per share: $30.00
PSD current price: $26.03
Expected Closing: End of Dec. 2008

I will be following more mergers and acquisitions, so stay tuned for more money making opportunities. There are chances that these acquisition deals might not go through, so these gains are not guaranteed, but likely.

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Tags: stock investing, stock market investing, mergers and acquisitions

Bill Ackman Pushes Target to REIT Spin Off, Pershing Square Capital

10/30/08

Hedge fund manager Bill Ackman of Pershing Square Capital Management proposed a deal to Target shareholders and executives that would separate Target's business operations from its currently owned land. The land would become a Real Estate Investment Trust (REIT) spin off, and Target would have to sign long-term land leases with the REIT. His fund already owns 10% of Target's stock.

Ackman argues that his deal would create value for Target, and in many cases spin-offs of subsidiaries in companies can create value, but what happens when you pull all of the most valuable assets out from under a company? Wouldn't that take away from Target's ability to get credit and cause Target to become a less valuable company? The balance sheet of Target would show a huge depletion of assets, which is a significant factor in the value of a company.

I don't see one good reason why Target would want to pay an inflated rent amount on something they already own. This REIT that Ackman wants to create would essentially suck the value out of Target by driving the cost up. Also, did I mention, the REIT is going to force Target to pay a dividend to it. Ackman claims the dividend won't be that high, but dividend claims can change from quarter to quarter, so who knows? I think this has been done before...

Remember the late department store Mervyn's? Mervyn's department store has gone bankrupt and will be closing all of its stores and firing all employees due to Cerberus Capital Management's structured deal of separating land and retail operations. They do something called "tunneling" where they have the land company charge the retail company an extremely high lease price, and also forced Mervyn's to pay a really high dividend to the land owning company. This is what drove Mervyn's to its end. Cerberus pulled the assets out from under the company, sucked it dry, get to sell off the land, and reap giant profits.

Kmart was not helped by Eddie Lampert's hedge fund doing a similar deal where they separated the land and sold it off, leaving Kmart on life-support after a bankruptcy filing.

Both Eddie Lampert and Cerberus Capital Management have made exorbitant amounts of money, and they left shareholders and employees absolutely nothing.

Bottom Line, these type of deals have proved to destruct value of the company. Management and Shareholders : DO NOT let Ackman's arrogance and financial sophistication seduce you into ruining such a great company. Ackman knows that he can make more money off of the real estate Target owns than he ever could on Target itself. Once he makes anywhere from several hundred million to a couple billion dollars, do you think he will care about Target?