Netsuite (N) – Merger Arbitrage – 8.5% upside

Current Price –$100.52

Offer price - $109

Upside – 8.5%

Expiration date – 4th November 2016

SEC filling

 

This is a bet that Oracle acquisition of NetSuite at $109/share will go through. Since the deal has been announced on the 28th of July, the shares traded close to or even above the offer price. Everyone was sure the deal was going through. But in the last week market’s opinion changed dramatically. Oracle’s CEO Larry Ellison beneficially owns 40% of NetSuite.

Netsuit share price

On the 7th of September the largest unaffiliated shareholder T. Rowe Price (18% stake) opposed the transaction essentially arguing that price is too low. Market hoped Oracle will come up with a higher offer, but that did not happen. Quite the opposite – Oracle extended the tender deadline for the second time (as it did not receive sufficient shares) and said this is the final extension – Oracle will walk away from acquisition if majority of unaffiliated shareholders do not tender. Oracle needs 20.4m NetSuite shares tendered for the transaction to go through.

Some more info and background here.

I admit I have no specific insight about this deal, and likely there are many much smarter guys playing this arbitrage. But my bet is that ORCL strategy of scarring NetSuite shareholders into taking the tender will work – these shareholders have already seen 10% drop in their NetSuite holdings over the last two weeks and probably they do not need any further convincing.

This is a tiny position for me due to the obvious risk that I can lose c. 15% if the deal gets cancelled. I do not believe the price will drop all the way to pre-announcement $75/share, as Oracle’s interest in NetSuite does not disappear even if the deal fails now.

 

 

9 COMMENTS

  1. exponential

    hi! wondering what your thoughts are on today’s earnings report and how it impacts your view of the tender offer? thanks in advance.

    1. dt

      I can only speculate, but for me the key part was:

      “Furthermore, the Company does not expect to achieve its previously-issued full year revenue outlook range of $955 million to $975 million and is withdrawing all previously-issued financial outlook for the full year 2016.”

      With growth slower than expected, shareholders should be more willing to sell. So I consider the scales to be tilted more towards ORCL merger after this release.

  2. Andrew Davis

    Are you still holding & tendering? And have you done any analysis on likelihood of Oracle completing without T.Rowe support?

    1. dt

      Yes, I am still holding and will tender, albeit this is a tiny position for me.
      Oracle needs 20.4m of unaffiliated Netsuite shares (out of 40.8m total) to be tendered for the acquisition to take place. Without T Rowe support (14.5m shares), 77% of the remaining unaffiliated shareholders need to tender. That is a very high hurdle to reach, but 20% price drop over the last couple of weeks should help convince some of the shareholders.

      Recent drop in share price suggests the market does not believe the deal will go through. I think there is a small chance it will and in any case Oracle’s interest in Netsuite is not likely to disappear.

    1. Richard

      Thanks for idea, I started following this after your post.
      Apparently, you entered the trade slightly too early – I loaded up mainly at $90/share, so for me 20% profits in couple of days.

      1. dt

        If I had known the shares would drop to $90 I would have gladly waited. With hindsight it is easy to spot better trades. In any case, happy I helped you make 20% and equally satisfied with my 8.5%.

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