Merger arbitrage in the Coherent bidding war

On the 19th of January Coherent Inc. (NASDAQ:COHR) announced that it would be acquired by Lumentum Holdings Inc. (NASDAQ:LITE) for $100/share in cash and 1.1851 shares of Lumentum for a total consideration of $5.7 billion. A few weeks later MKS Instruments (NASDAQ:MKSI) kickstarted a bidding war with an unsolicited proposal only to be joined a few days later by II-VI Incorporated (NASDAQ:IIVI). Since then a multitude of improved proposals have been launched, all increasing the purchase price step-by-step while increasing the cash consideration and decreasing the equity consideration.

MKS Instruments dropped out of the bidding war some time ago. Yesterday Lumentum made its latest bid, valuing the company at $6.9 billion with a $220/share cash consideration and 0.61 shares of LITE for a total consideration of $274/share (using yesterday’s closing price). This morning II-VI upped the stakes with a bid of $220/share in cash and 0.91 shares of UUVI for a total consideration of $285/share (using the pre-market IIVI price). Coherent already declared the latest bid of II-VI a superior proposal and while this bidding war is probably reaching its final stages, there is certainly a decent chance we will see a couple more small price jumps.

So now that we have had a quick recap of the story so far, what would you expect the current price of Coherent to be? Surprisingly enough, the stock is in the pre-market trading at $265/share, at a decent discount to both the latest Lumentum bid (~3% spread) and the latest II-VI bid (~7.5% spread). During most bidding wars you see the target consistently trading above the latest bid price because people (almost) always expect that higher bids are a possibility.

In this case it is clear that a deal will be reached to sell the company above the current stock price, and it is certainly possible that both parties have some room left to bid more. So, apparently the market is pretty skeptical about the ability of the eventual acquirer to close the deal. Perhaps regulatory approval could be an issue, since it certainly will be a combination of two sizable companies in the same industry. But at the same time, as an outsider, it does not look too hard to me for this deal to get approved. MKS Instruments will remain as a very sizable competitor, and there multiple other sizable competitors such as IPG Photonics as well.

Perhaps I’m missing something crucial here, but to me it looks like that a bet on Coherent has pretty good odds. If there are no more bumps to the purchase price: fine. If there are more bumps: great.

Disclosure

Author is long Coherent

15 thoughts on “Merger arbitrage in the Coherent bidding war

  1. Dan

    Another bidding war situation is AEGN. Not quite as good as COHR as the latest bid is below the current price and the competing bidder is Apollo (similar to Brookfield in screwing acquired company shareholders I.e. Changing or getting out of deals whenever they feel like it). So there is a possibility that the competing bidder might be annoyed by the process and drop out after which then Apollo might try to reduce their bid after the original bidder drops out. But even in this case your downside is probably not that bad.

    Reply
  2. Aharon

    Weird stuff going on in merger world. COHR trades surprisingly (to me) wide, and MX announces a go-private and is trading at a ~13% below takeout price. Lotta skepticism right now, I guess.

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        1. RC

          Con: Bidding war likely over.
          Pro: Deal should close more quickly. Could hedge out your exposure to probable acquirer.

          Reply
  3. RC

    I think that is typical of most merger arbs. No free lunch. As all the other suitors have withdrawn do you think it is wrong to view the position to be long .91 IIVI at a discounted price at this point?

    Reply

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