Friday I sold my position in Nanosphere at $1.71, one cent above the $1.70 offer of Luminex. The market is clearly pricing in some probability of a small bidding war between the third party that made an unsolicited offer at $1.50/share and Luminex, and I guess the market is probably right about that. I don’t know nothing about this third party though, and since Luminex has already increased its price by 26% from its initial offer I doubt that there is a huge amount of room left to go higher. In addition to that the breakup fee was also increased, although a $3 million fee on a $75 million deal would probably not deter a seriously interested party.

So I wouldn’t be too surprised to see a higher bid emerge, but I have sold anyway. Mainly because I know that I would never speculate on this and buy a position in the stock at the current price. Often people use that kind of logic as an argument that can lead to only one conclusion: if you don’t want to buy it, you need to sell it, but I actually don’t think that is really the case. Selling incurs transaction costs that can be significant when it’s in the context of merger arbitrage where spreads are small. That’s why I waited for the price to go a bit higher than my threshold for where I wouldn’t buy the stock.

Disclosure

Author has no position in Nanosphere anymore

Today Luminex announced that it has increased its bid for Nanosphere with 26% from $1.35/share to $1.70/share as a result of an unsolicited third party offer at $1.50/share. When you enter the merger arbitrage game you don’t expect to make huge gains, but the fact that there is a small probability of a very favorable outcome like this acts nicely as a partial balance for the fact that there is also a small probability of a very negative outcome when the deal fails. Pre-market the stock is up to $1.67 which means that the spread also has narrowed to just 1.8%. But maybe some market participants are now hoping for a bidding war, although with the increase in the breakup fee that’s probably not very likely:

In response to the events described under Item 7.01 of this Current Report on Form 8-K, on May 22, 2016, the Company, Merger Subsidiary and Nanosphere entered into a First Amendment to the Merger Agreement (the “Amendment”) that (A) corrected scrivener’s errors such that the Offer would expire at 12:01 a.m. Eastern Daylight time on the 21st Business Day after commencement; (B) increased the per share Offer Price to $1.70 per Share; and (C) increased the Break-up Fee to $3,000,000.

Disclosure

Author is long Nanosphere

Last Sunday Nanosphere announced that it will be acquired by Luminex for $1.35/share. Luminex is a $837 million market cap company while Nanosphere is being acquired for $58 million. Just $16.5 million is payment for the outstanding ordinary shares, the remainder is for the outstanding debt and the convertible preferred stock. Luminex is planning to acquire Nanosphere through a tender offer that will be launched within 15 business days after the merger agreement was signed. Since most tender offers remain open for ~20 business days the merger should be completed before the end of June. This is confirmed in the press release that guides to an expected close in the second quarter of Luminex FY2016 (that ends December 31).

So the deal should close quickly, and there are really no big risks that can stand in the way. Regulatory approval isn’t an issue for such a small deal, Luminex can finance the deal with cash on hand and Nanosphere is a great strategic fit for Luminex. One condition of the tender offer is that at least a majority of the stock is tendered, but that shouldn’t be a problem since Luminex is offering a 73% premium. So I think this is a super low-risk deal, but presumable because of the small size of Nanosphere the spread is relatively wide and it’s possible to buy the stock at $1.31. This means an upside of 3.1% which I think is great for a deal like this.

Disclosure

Author is long NSPH