The new year has started with a big bang in the mergers & acquisitions universe: Dell (DELL) is being pursued by multiple interested parties in a leveraged buyout that is vaguely reminiscent of the pre-financial crisis LBO golden era. Any potential bid for Dell seems to be part of a growing theme - available cash in the coffers of private equity firms, hedge funds and corporations alike has reinvigorated the M&A world. It's a bit early to tell, but 2013 may go down in history as "The Year of the Buyout."
A few weeks ago, I personally benefited from one of the buyouts (or buyout-like transactions) of 2013 when a consortium of parties agreed to buy part of (and invest in the remainder of) Supervalu (SVU). The buyout rumors had begun in 2012 and it was no secret that a deal was close to happening, but impediments, including the ability for Cerberus to obtain financing, brought uncertainty and sluggishness to the process. In the end, a Supervalu shareholder gained about 15% on the announcement day pop, about 40% from the January 1st price (when increased rumors helped share price creep higher), about 50% from when I advised bullishness on SVU shares on November 29th, or about 100% for any buyer lucky enough to pick up shares at the absolute lowest prices in late July or mid-October. Investors still holding shares will enjoy additional returns if shares creep closer to the $4 tender price from the $3.50 current market price.
I also made money when Sprint (S) received a buyout offer from Softbank. I had originally purchased Sprint after becoming a Sprint customer (and due to favorable valuation and metrics, after some due diligence), but I had not bought it specifically because of any buyout potential. Sometimes things just work out well.
But the future is all that matters now - so back to Dell. In the newest news, it appears that Microsoft (MSFT) may provide a portion of the LBO financing; however, information is murky on whether financing would be mezzanine or of Microsoft is interested in a more permanent, strategic stake. At the January 22nd closing price of $13.12 per share, Dell's market cap is $23 billion; between Microsoft and leading PE suitors, it appears as though a majority of needed financing may already be lined up. Despite the money materializing, I wouldn't count on a deal getting done in the immediate future. As is the case in all transactions from buying lunch to buying companies, price is likely to be the issue.
Six month chart, courtesy Yahoo! Finance:
Prior to the buyout rumors leaking, Dell traded at $11. The last time that Dell was over $11 was in August; since then, shares had traded as low as $9. Over the prior year, shares did trade as high as $18.
Clearly, PE investors aren't charities, and are attempting to pick up a distressed asset at a distressed price. They likely baked in a reasonable 50% premium to a September-January average price of $10, and might be structuring and financing a transaction that will offer $15 for shares. However, Michael Dell, recent buyers, and institutions probably will balk at accepting just a 15% premium to recent prices and what they would generally consider a discount to "intrinsic value." I expect that the difference between an offer ($15 to mid-teens) and expectations ($20 or more) will derail, or at least delay, a deal. Still, with shares trading about 35% below 52 week highs, it may not be too late for a speculative buyer to have a decent risk-reward proposition on the prospective transaction.
Beyond Dell, there are other stocks that are frequently mentioned as potential targets for vultures or strategic acquirers. My thoughts on some of those names are as follows:
- Zynga (ZNGA) - I think there is some chance that Zynga receives a buyout offer this year. Shares trade only 15% above all-time lows and about 75% below IPO pricing. Zynga's $1.9 billion market cap is only $275 million (~15%) above tangible book value. If Zynga shows success in right-sizing its business, strategic or even PE buyers may be interested, especially if online poker is legalized in the US, which seems not entirely unlikely. If that does occur, a casino company like Las Vegas Sands (LVS), Wynn Resorts (WYNN) or MGM Resorts (MGM) might become interested in Zynga's online technology, user base, and popular games. LVS's $44 billion market cap could easily absorb Zynga.
- Best Buy (BBY) - Best Buy's founder, Richard Schulze, is supposedly working on a bid for his company, and he has until February 28th to make a fully-financed offer to Best Buy's board. Shares have recently rallied due to a favorable December sales report and buyout hope. Schulze does seem intent on taking back his company, though a turnaround in performance and increase in share price may decrease chances of a buyout. Until late February (or perhaps even later), BBY shares will likely fluctuate as rumors of near-completion or imminent meltdown hit wires.
- Netflix (NFLX) - Ever since Netflix's fall from grace, bulls have pointed to the possibility of a buyout as one reason to get long NFLX shares. Carl Icahn's purchase of shares this fall only increased chatter. However, I do not think that a Netflix buyout is likely. Beyond its customer base, Netflix's business is easily duplicated, and serious rivals like Amazon (AMZN) have decided to build their own Netflix-like services rather than buy Netflix. There are still a few big-enough companies (like Apple (AAPL)) that are without a comparable service and have a cash hoard or balance sheet capable of absorbing Netflix, but I wouldn't expect any to bite.
- Research in Motion (RIMM) - When RIMM shares traded for $7 (50% below book value) and BB10 was a figment of Canadian imaginations, a strategic or PE buyout might have been thinkable. Since then, shares have rallied by over 100% and Research in Motion is readying BB10 for market, so it looks like Blackberry has at least temporarily survived the gauntlet and will live as an independent company for at least a while longer.
- Nokia (NOK) - Nokia, similarly, is now 100% off lows and business seems to be improving. A takeout may have happened six months ago, but seems unlikely now. However, a stagnation in success with its Windows 9 devices may lead to a Kodak-like death spiral with a white-knight asset buyer salvaging some value for shareholders.
- Traditional & Cyclical Buyout Targets - Look for consolidation in the financial services industry, especially small banks, as bigger, healthier ones look to gain market share or expand into new geographies. The pharmaceutical industry is always an active M&A space. The energy sector will continue to see action - it is a very hot area for PE money. Large companies are continuing to streamline operations (as was seen when Marathon Oil (MRO) spun off Marathon Petroleum (MRP), which creates interesting value propositions for investors.
These are just a few of the companies and industries that are likely to see M&A action (or at least chatter) in 2013. As long as the domestic and world economy doesn't collapse, it seems likely that corporations and large investors will eagerly deploy their bloated coffers via acquisitions this year.
Additional disclosure: Long BBY, SVU, S, NOK, RIMM, ZNGA, AAPL via stock and/or calls. Short NFLX via long put position.