Introduction and background
Open Text (NASDAQ:OTEX) agreed with business intelligence/analytics software vendor Actuate Corporation ("Actuate") (NASDAQ:BIRT) to commence a tender offer on Dec. 17, 2014 to acquire all the outstanding shares of Actuate for $6.60 per share in cash. The tender offer represents 89% premium in comparison to the previous day but it is cheap in comparison to the price level of Jan. 1, 2014.
Actuate's business is described in its website as follows:
"Actuate provides business analytics products (BIRT software solutions) and reporting tools that enable corporate users to transform raw data into customer insights quickly and easily with a simple drag-and-drop interface."
Briefly, Actuate develops open source software for the Business Intelligence sector. As other open source businesses, it has issues to make the software profitable. Management has started recently to transform the marketing strategy trough the implementation of a subscription based pricing model and a free version of the product. The revenues were not enough to compensate the increasing operating costs in the last three years and the new strategy is intended to help. There is a very good article written by David Hernandez which explains these challenges.
Open Text provides Enterprise Information Management strategies and will acquire Actuate's know-how in IT Business intelligence to compete with other players in the market. Other bidders in this M&A process could have been IBM, SAP, Oracle (NYSE:ORCL), Microsoft (NASDAQ:MSFT), Tableau (NYSE:DATA) and Qlik (NASDAQ:QLIK).
In order to make a quick review of the terms of the tender offer I have prepared the following table including: the type of buyer and the type of target with links to find information about them, the conditions to meet, the potential profit and the expected termination.
Transaction: Open Text Corporation to Acquire Actuate Corporation
Market cap/AUM: $7.22B
Market cap: $330M
Tender approval: 50%
Antitrust: HSR Act
Financing condition: No
Special conditions: No
12/1/2014 Spread: 0.76%
12/1/2014 Annualized Spread: 9.12%
Press release / SEC Filing
(Please, find more information about merger arbitrage here)
Why do we have a merger arbitrage opportunity?
There are several factors that we need to look at when doing merger arbitrage. Some are more important than others. The first big thing to review is the size of the target compared to the buyer. Regarding this, this merger makes a lot of sense. A corporation of $7.22 billion has all the financial tools to acquire a little company of $330M like Actuate. Second, the conditions, either financial or regulatory, will affect the risk of the merger too. The case of today is not risky at all regarding the conditions since we only have the HSR (Hart-Scott-Rodino Antitrust Improvements Act which is always a condition in the U.S.) and we do not see a financial condition -- which is actually very rare.
In addition, the timing of the transaction is very important. In this case, the fact that the transaction is structured as a tender offer is very interesting since we will be paid fast (a merger is slow since the shareholders have to vote). If we assume that we will receive the money in a month, being very optimistic, we can annualize the spread as follows:
(0.76%) * 12 months in a year / 1 month = 9.12%
In the literature we can read the probability of obtaining 9.12% is 95%. In the other 5% of the cases we can lose the premium (89% in this case).
(I would like to remark something about this return. What investment professionals search is not high return but high alpha ("seeking alpha" is this site recall). This is a measure of return adjusted with a measure of risk. Due to this concept a 9% return with 95% probability of success is much better than a 30% return and unknown probability.)
Finally, there is a very good feature of the buyer that we should note. If we take a look at the transaction presentation, the buyer group has a long history of acquisitions:
This provides proof of the experience of Open Text in the M&A market. The employees as well as the labor unions know much about it and will not panic. For management these processes are always a little bit traumatic and it is better if everyone is aware of the situation as in this case.
Investment idea and conclusion
The size of the buyer, the timing of this merger, the absence of conditions, the reduced risk and the experience of the buyer in M&A processes make us recommend this merger as a merger arbitrage opportunity. It will return a good return annualized (9.12%) with low risk which is the type of investment that I want in my portfolio.