If you've been on either end of a takeover situation - owning the shares of either the buyer or the seller - the market dynamics should be familiar enough. The acquirer's shares usually trade down immediately following the announcement, while shares of the acquiree trade higher. In the market's judgment, which I wouldn't fault in this case, acquirers typically overpay, so the standard share price reaction is pretty reasonable.
When the shares of the acquirer rise following a takeover announcement, that's an unusual circumstance worth investigating. This is exactly the situation in the apparel space, with multiple instances over the past month or so.
In December, Oxford Industries (OXM) snapped up Lilly Pulitzer, a women's resortwear line, for $60 million. For fiscal 2011, the business is projected to have operating income of more than $11 million. That is a seriously cheap acquisition. No wonder the shares popped 22% the day following the announcement!
Today, Perry Ellis (PERY) shares are pumped up following news of its own tuck-in acquisition. Perry Ellis is picking up women's sportswear specialists Rafaella Apparel Group, which is controlled by private equity shop Cerberus. Perry Ellis is paying $70 million, plus issuing warrants to purchase a little over 100,000 shares of stock. Rafaella sports trailing EBITDA of $12.4 million, so this looks like another attractive acquisition. Perry Ellis shares are popping today, to the tune of 10%.
So what is it with these apparel acquirers? How are they getting such good deals? Well, for one, both acquisitions are of private companies. Whenever there's a mismatch between public and private company valuations, there's an opportunity for arbitrage.
Also, in the case of Oxford, the management of the acquired company noted that it was not seeking a sale when Oxford approached it in 2010. Avoiding a competitive bidding process is a great start if you're hoping to not overpay. Leonard Green, which has offered to take J. Crew (JCG) private, faces the risk that other buyers will come to the table during the preppy clothier's "go-shop" period, which ends next week. Both Sears Holdings (SHLD) and Urban Outfitters (URBN) are reported to have mulled bids after reviewing the company's books.
So, have you seen any other acquirers' shares pop recently? Maybe this is less rare than I've supposed. Share any instances you may have spotted in the comments section below.
Disclosure: Author has no positions in companies mentioned.