Fitbit (FIT) – Merger Arbitrage – 12% Upside

Current Price: $6.56

Offer Price: $7.35

Upside: 12%

Expected Closing: 2020

Offer Document

 

Alphabet/Google is acquiring Fitbit (wearable bands) for $7.35/share in cash. Shareholders have already approved the transaction, however a considerable spread remains. The main reason is uncertainty of regulatory approval in US, EU, Australia, Canada and potentially UK. This is especially concerning given Google/Alphabet is already under intense scrutiny by regulators regarding customer data and privacy.

Antitrust approvals per se should not be an issue as among wearables Fitbit is only in the 5th place worldwide (4th according to Canalys), 2nd in the US (where the market is dominated by Apple: 38% Apple vs 24% Fitbit). Google's smartwatch operating system has only minuscule share of the market. Thus the merger wouldn't really harm the competition in any way.

The problem is that Alphabet/Google is getting access to large amounts of data that is collected from Fitbit customers (heath, wellness, fitness, location etc.). So far there have not been any precedents when a merger was blocked due to the customer privacy concerns, however this topic is becoming more and more sensitive and big tech has already received a warning. So this transaction has a potential to become the first example.

Chief of DOJ antitrust division has stated that:

Amassing a large quantity of data is not necessarily anti-competitive. The more complicated question for enforcers is how data is collected, analyzed, and used, and, most importantly, whether these practices harm competition.

Fitbit calmed the users saying that the data will not be used for Google ads:

Strong privacy and security guidelines have been part of Fitbit’s DNA since day one, and this will not change. Fitbit will continue to put users in control of their data and will remain transparent about the data it collects and why. The company never sells personal information, and Fitbit health and wellness data will not be used for Google ads

Google VP has also made a similar statement and added that users will be allowed to "review, move, or delete their data."

Europe's antitrust chief has stated that regulators are indeed concerned with data becoming a target for acquisitions, however she did not make specific comments about FIT transaction. Looking back to 2016 at Microsoft/LinkedIn merger - data acquisition was also the main issue there, however the transaction nevertheless received a conditional blessing. Approvals from US and Canada were also received.  EU antitrust chief then noted that a concern is not only holding a lot of data, but its uniqueness, which makes it impossible for others to duplicate.

The data Fitbit holds isn't really unique unique as all the other competitors also monitor and gather the same data (healthcare, location etc).

In case the merger fails due to the antitrust risk, FIT will receive $250m termination fee ($0.96/share).

Even after counting in the termination fee, the downside is significant - 25% to pre-announcement price.

5 COMMENTS

  1. Ilja

    The prospect for this transaction seems not to get any better. Rumours appeared that both DOJ and AGs are likely to file antitrust lawsuits against Google by the end of summer. Meanwhile, BEUC (European consumer group) also expressed their concerns about this merger.
    Current upside stands at 14%.

    https://www.wsj.com/articles/justice-department-state-attorneys-general-likely-to-bring-antitrust-lawsuits-against-google-11589573622
    https://www.reuters.com/article/us-fitbit-m-a-alphabet-eu/eu-consumer-group-warns-against-game-changer-google-fitbit-deal-idUSKBN22P29F

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