Merger Arbitrage – 40% Upside
I suppose you could call this idea ‘undercovered’ as the only place I’ve seen it mentioned is this very brief note on Clark Street Value a month ago. It piqued my interest initially, but I decided to shelve it as it seemed just a bit too speculative. However, the merger arb spread has now widened from 30% to 40%-45%, while the remaining timeline is substantially shorter. I have digged deeper into the setup, and, despite the market’s skepticism, I’d say the deal has a high likelihood of closing on the current terms. But keep in mind that ASXC is probably a zero if this merger fails. So do your own due diligence and size positions accordingly.
In early April, Asensus Surgical has signed a non-binding agreement to be acquired by German medical device manufacturer Karl Storz. Consideration is “best and final”, at $0.35/share in cash. The spread initially stood at 20% and gradually widened to the current 40%-45%. Both companies have entered into 10-week exclusivity period to allow for due diligence and negotiation of a definitive agreement. With 5 weeks already passed, the exclusivity period is set to expire on June 12. I’d expect to expect an announcement of a definitive agreement to be out by that time.
ASXC develops robotic surgery systems. The company already has one commercialized product, Senhance, and is currently developing a much more advanced surgical robot, Luna. ASXC also offers image analytics software that enhances the performance of its robotic system.
Optically, the downside to pre-announcement levels is small, at 16%. However, a large wrinkle in this setup is that ASXC is about to run out of cash. As of December 2023, the company had $21m in gross cash, which was projected to last until early June. To address this, Karl Storz has agreed to provide a bridge loan of up to $20m. The loan will be disbursed in installments: $1m weekly until the exclusivity period ends, followed by $10m upon signing the definitive agreement ($5m at signing and $5m a month later). The bridge loan terms look pretty standard. The rate is set at SOFR + 10%, which sums up to around 15% in total at the moment. However, if no agreement is reached, ASXC will need to repay the loan in 30 days, likely resulting in a massive equity raise or, more probably, bankruptcy. The currently commercialized Senhance robotic system hasn’t been a success, struggling with sales and far from profitability. Luna isn’t expected to launch until early 2026. If Karl Storz backs out, raising fresh capital under such circumstances would likely be very challenging.
So the key reason for the spread is market’s fear that without the buyout, ASXC could go bankrupt, and that Karl Storz might have deliberately added the bridge loan into the agreement in order to take advantage of the situation. In other words, there’s a risk that Karl Storz could back out of the deal, demand debt repayment, push ASXC into Chapter 11, and then take control of the entire company as its sole debt-holder.
However, I think this risk is minimal. All indications suggest that the buyer is actually acting in good faith and I do not think something unexpected will be discovered during the due diligence.
Karl Storz is a highly reputable strategic buyer and a global leader in endoscopy device market (see here and here). By last year, its endoscopy system has been installed in 10,000 operating rooms, giving it a market share of 20% in the U.S. and EU. Run by a founding family for 3 generations, the company has 9,400 employees and generated €2.2bn in sales last year. The buyer also has a track record of other recent strategic acquisitions, including AventaMed DAC (2023) and Innersight Labs (2024).
The actual buyer of ASXC would be Karl Stroz’s VentureOne – the newly established venture arm focused on robotics, AI and the development of an ecosystem for robotic surgery. ASXC fits this niche perfectly and, crucially, will be VentureOne’s inaugural acquisition. In my opinion, this significantly limits the likelihood that Karl Storz is scheming with intentions to gain control of ASCX cheaply in the bankruptcy. Reputational risk for the company and particularly its VentureOne arm would be too large.
Karl Storz has already been in partnership negotiations with ASXC for over a year and should be well-acquainted with the company’s R&D, IP and existing products. In February 2023, Karl Storz and ASXC announced a preliminary collaboration agreement that encompassed several aspects:
- Karl Storz would market and sell ASXC’s software as a standalone product through its extensive network of relationships with hospitals and surgeons;
- Both companies would also collaborate to integrate this software into Karl Stroz’s vision systems;
- Furthermore, the parties would work on developing next-gen instrumentation for ASXC’s upcoming robotic system, Luna.
This was announced like a pretty big deal at the time and was PR’ed by both ASXC and Karl Storz. The parties even arranged an investor/analyst day just to present this collaboration to investors (see the transcript here).
The willingness of Karl Storz to market, integrate, and develop parts for ASXC’s products already implies a pretty strong confidence. From there on, both parties have had more than 1 year of additional negotiations during which the buyer clearly wasn’t sitting idle and I’m sure some additional DD was being done.
It’s no surprise that the talks took so long, as the original partnership negotiations have probably shifted towards full buyout talks some time ago. The takeover offer was announced as “best and final”, suggesting this wasn’t Karl Storz’s first bid. The buyer likely made a few lower bids privately before both parties agreed to publicly announce the current one.
While such a turn in negotiations (i.e. from collaboration to full buyout) is a bit unusual, it is likely explained by the dire liquidity situation of ASXC. In order to start selling ASXC’s products/software to own clients, Karl Strolz first needed to ensure continuity. With ASXC having insufficient liquidity to last more than a year and a couple more years expected on the development of Luna system, the initially planned collaboration agreement was doomed to fail without concurrent financing arrangements. The full buyout solves this problem. The extended timeline of negotiations can probably also be attributed to Karl Storz’s naturally longer bureaucratic processes (large company, many decision makers and decisions taken only in monthly meetings, etc.), especially given that this is the first acquisition for its new venture arm.
All in all, I’m fairly comfortable that the buyer is acting in good faith and is unlikely to screw ASXC shareholders by pushing the company into bankruptcy. Equally, I do not think anything unexpected will be discovered during the ongoing due diligence that would cause withdraw the takeover proposal. Karl Storz has likely already accumulated considerable insight into ASXC’s technology and the prospects for its solutions during the one-year-long engagement process. After all this, Karl Storz still decided to acquire ASXC at a significant premium and to lend money to the company (knowing that ASXC will have no means of repaying this debt). To me, this seems like a sign that most of due diligence has already been done and the final steps are more procedural in nature (might be just wishful thinking on my side).
Listed to the cc. Didn’t know what to make of it.
Not sure what “cc” stands for but I read the call transcript and, maybe it’s confirmation bias, but it seemed like ASXC were keen for the deal to go through and they had already utilized 7m of the available financing from Storz. If this thing hasn’t fallen over between Feb-23 and now, then I can’t understand why they would provided debt financing to keep their acquisition target alive unless they were pretty damn certain they were going to go through with the deal. Then again you can fit my merger arb knowledge an experience inside a pea….
conference call
my concern is this is a loan to own situation. company burning money like a dumpster fire
So it could be a zero, but the incentives all round don’t imply that. But because it could be a zero, and because I don’t have much merger arb experience I’ve sized it small enough that it won’t hurt me too much financially if it goes to zero (but the psychological damage will surely last).
From a fund perspective, which I’ve got a bit of background in, you would never use an aggressive tactic like that for an inaugural acquisition, unless it was the only one you needed to spend the fund because no one would voluntarily transact with you after that. That take is purely qualitative and hard to handicap, but I have a hard time seeing the acquirer take that direction given their background and incentives.
Putting myself in mgmt shoes, I would expect they are hoping for some kind of CVR given there is some indication there will be growth if they could just survive long enough to see it. But, if it comes down to the wire they can fold and accept the $0.35. Doesn’t preclude them from being bull headed, but in the CFO’s own estimate of the $10M getting them only to Q3, I just don’t see there being enough time for a plan B if they scuttle the deal.
Still no PSA
Really going to the wire, huh?
Yes, makes me wonder if there will be a deal or not. After research I thought this one would happen but i guess we will see.
News is out: Definitive agreement signed! Congrats and thanks.
Why is there still some mispricing => trading .3340 aka 5% …..?
Risk free rate is at 5% and this is a penny stock. There’s got to be some spread to compensate for the extra risk.
well, the deal is 100% secured…. and it wont take 1 year to close, right ?
“The transaction is anticipated to close during the third quarter of 2024, subject to customary closing conditions, including receipt of approval from the Asensus stockholders.”
35c buyout, 33c price now, = 6% spread, or roughly 1.5% risk-free rate + 4.5% for the risk.
My thesis that Karl Storz has been acting in good faith as a potential buyer of ASXC has proven correct. Both parties have finally signed the definitive agreement, with the terms unchanged, at $0.35/share. The stock price has jumped by over 40% on the news. Outside date has been set at October 30, so I guess the deal is expected to close by the end of Q3 or the beginning of Q4 at the latest. 5% spread remains, explained by the remaining timeline and massive (potentially 100%) downside just in case something goes wrong (albeit that’s highly unlikely at this point). The idea has played out really well with 35% return in 1 month.
Does someone have an opinion about the chatter on stocktwits?
Is that just the usual BS, like law firms hunting for clients, or to be taken more seriously?
Market hasn’t really reacted to it, but ASXC seems to care, by amending their proxy continuously and issuing that note: https://ir.asensus.com/node/15036/html
honestly – this could be useful if it gapped down a bit. May turn a 5% spread into a few more %.
From the last section (“Own or not, vote”) of the note issued by ASXC, it’s possible that they’ve received a significant number of “against vote” so far and started to worry.
IB sent out the proxy on July 10. Everyone please vote. How many votes do we need? two third?
And for anyone who consider buying, please note that ASXC is a penny stock and the commission fee is $0.005/share (capped 1%) at IB, and that ASXC currently has a wide bid-ask spread. So the effective spread is not as large as it seems.
Seems that a simple majority is needed.
“other than the approval of the holders of a majority of the outstanding Shares entitled to vote on such matters at the Stockholders Meeting (the ‘Company Requisite Vote’).”
https://www.bamsec.com/filing/143774924019546/2?cik=876378
Every ASXC shareholder please vote.
IB e-mailed shareholders the online voting link on July 10. Please check your email inbox, titled “Special Meeting Notice: Asensus Surgical, Inc.”
Votes must be received by August 6, 2024 06:00 PM, Eastern Time.
The proxy material says approval from a majority of ALL outstanding shares is required. Non-votes have the same effect of “Against” votes.
However, the special meeting could be adjourned our postponed in order to solicitate more votes.
“To be approved, the merger proposal must receive the affirmative vote of holders of at least 136,308,166 shares of our common stock, which represents a majority of all shares of our common stock issued and outstanding and entitled to vote as of the record date.
Abstentions, shares not voted and broker non-votes, if any, will all have the effect of a vote “AGAINST” the merger proposal. “
Meeting postponed to August 20th.
“Asensus Surgical announced that the Company’s Special Meeting of Stockholders, scheduled to be held on Wednesday, August 7, 2024 at 10:00 a.m., was adjourned to Tuesday, August 20, at 10:00 a.m. The company said, “The Special Meeting will be held virtually. While we have received proxies for approximately 52% of our outstanding shares with a large majority voted in favor of the merger proposal, we still need more votes to approve the transaction. This is a very low turnout for such an important vote and we encourage you to vote your shares as soon as possible. No matter how many shares you own or how you intend to vote, your vote is important. The Company has adjourned the Special Meeting to allow its retail stockholders additional time to consider and vote on each of the proposals, which are described in the Proxy Statement.”
If needed, can they also move the record date, so as to allow more of the current shareholders to vote?
Share turnover has pretty heavy in recent months, and I guess many of the record-date shareholders have since sold out and have no incentive to vote.
Hi @dt,
In your weekly update, you said “While low turnout in nano-cap stock buyouts isn’t entirely uncommon, it’s surprising that over 4% of ASXC’s voted shares were apparently cast against the deal. ”
Where do you find the 4% number?
If “against vote” is just 4%, then it means ASXC has already secured 48% (=52%-4%) “yes vote”, and would need just additional 2% “yes vote” to achieve majority approval?
P.S. I see a reddit thread where some disgruntled shareholder said they voted against the proposals because they lost so much money on ASXC that they don’t care any more.
Ok, I can see how that was completely unclear. Here is what I intended to communicate with “OVER 4% of ASXC’s VOTED shares were apparently cast against the deal”:
– 52% of shares voted.
– less than 50% of those in favor of the transaction (otherwise the deal would have been approved).
– meaning at least 2% of total outstanding shares were against the transaction.
– 2% of total outstanding shares is approximately 4% of the shares that participated in the vote.
=>> over 4% of ASXC’s votes cast were apparently against the deal.
Hope this clarifies it.
https://www.sec.gov/Archives/edgar/data/876378/000143774924025038/asxc20240807_defa14a.htm
According to todays filing they still hunting down June 28th shareholders. I have no idea if they can change the record day. If possible, they probably would have done so already(?).
In a previous/recent quick pitch case on SSI, the board changed record date in order to solicit more votes (arguing that high volume of turnover had change the shareholder base significantly).
I don’t remember the name of the case, but I guess dt should. It was recent.
MINDP comes to.. mind!?
Yes, the precedent was MINDP.
The good news for ASXC is that, yes they can change the record date if needed.
The bad news is that, the management stated that among the 52% already voted, only “a large majority” voted in favor.
I believe at least 1/5 of the 52% voted against the proposals, otherwise management would say “overwhelming majority”.
So we still need at least additional 10% of the outstanding shares to come out to vote.
re MINDP’s situation, quoting dt: “The record date has been moved to July 16 (versus the original February 27 and then April 26). Management believes this will substantially help to solicit the required votes and will allow more of the new post-offer-announcement shareholders to vote. The company claims that since the end of April 680k pref. shares (or 40% of outstanding), were traded in the market. Most of these new shareholders are probably active arb players and should be incentivized to participate in the vote. Management also noted that it was contacted by “a number of such holders” who expressed their concern with being unable to vote. This record date adjournment will address that.”
Hi snowball, where were you able to confirm that the record date can be changed?
Because of the moderation around links perhaps drop the exclude the http www prefix if you send a link. The market opens in a couple of hours and I’m hoping to make a decision between now and then, in part based on the confirmation of their ability to change the record date.
thanks heaps if you happen to answer quickly enough!
Hi @G98 , in the case of MINDP, the record was moved, in fact twice, to solicit more votes presumably from the arbs.
Thanks for the fast response, much appreciated.
So, to be clear, you’ve determined that ASXC can move their record date based on the fact that MINDP was able to move their record date, and not based on anything specifically mentioned in the ASXC merger document (or perhaps another ASXC document)?
This comment from wrister “but the record date is stuck at June 28, right?” sticks with me.
The merger doc with its convoluted language (and DT comment) state that the Outside Date can be changed, and we know the meeting can be adjourned, however, to me, knowing that the Record Date can be changed definitively (preferably based on an express statement) is significant to the risk/reward given the recent widening of the spread.
Earnings released yesterday, about 55% have voted with over 80% approval of merger, of those that voted.
That brings us to roughly 44% yes votes wrt total votes, or about 6% to go.
https://ir.asensus.com/node/15076/html
That’s spot on with snowball’s estimate above: “I believe at least 1/5 of the 52% voted against the proposals”.
The good news is that in one week, management found additional 3% of shareholders to vote (participation up from 52% to 55%)
But I am very surprised so many (20%) of the voting shareholders are against the merger without any vocal opposition for the transaction. What else are they expecting? Management clearly stated that without this merger, the company will file for bankruptcy:
“If the merger is not approved, we face significant near-term financial obligations, including a repayment to KARL STORZ of their $20 million securitized note plus interest and payment premiums as well as transaction expenses we have incurred in connection with the pending merger. The sum of these obligations exceed the available capital on our balance sheet. We do not believe we are in a position to raise the capital needed to fund these expenses and also to continue funding operations. Therefore, if the merger is not approved, we expect to seek bankruptcy protection.”
I continue to think management will either find additional 6% of shareholders to vote for the transaction or somehow those that voted against it will be convinced to change their mind:
– The good thing is, that there are sufficient votes to continue adjourning the meeting (this one requires only majority of those voting, rather than of all shareholders) till the voting threshold on the merger is reached.
– If every additional trading day more stock lands in the hands of arbitrageurs, who will be for the merger.
“If every additional trading day more stock lands in the hands of arbitrageurs, who will be for the merger.” – but the record date is stuck at June 28, right?
This kind of reminds of of FRTX last year, nanocap company that tried to get enough votes to liquidate. The first time they adjourned ( https://www.sec.gov/ix?doc=/Archives/edgar/data/819050/000162828023039401/frtx-20231116.htm ) they had 33% of total voting rights in favor of the liquidation (2m shares for, 340k shares against) and after multiple adjournments they managed to get that up to 46% (2.7m shares for, 380k against). Still not enough, but the fact that they managed to get that many extra votes after a few adjournments makes me cautiously optimistic here.
That said, there are clearly a lot of disgruntled (retail) shareholders who probably own $40 worth of stock after the enormous decline and would rather see this burn down to the ground instead; I’d be careful.
The question seems to become: how much time do they got to collect the votes? What’s the break date for the offer?
6% seems manageable, but if they collected another 3% of the total vote in one week and got another week until the next meeting date, linearly interpolating, that won’t suffice. Also, when changing the record date, they need to re-collect all votes and need more time.
October 30, 2024 is the outside date for the merger, so unless extended that doesn’t give a lot of time for creative solutions.
I am guessing Karl Storz would happily extend the outside date if the company is a couple of votes short from approval. But in any case there are still 2.5 months till the outside date.
They would have to change the record date for the votes of those newly arrived arbitrageurs to be counted. Can the board alone make that change?
You may also be interested in another interesting merger arb situation, Asia Cement (China) Holdings (HKG: 0743), 6.6% spread to offer of HK$3.22.
Its similar in the sense that in 0743 there also are many disgruntled retail shareholders who are so angry that they insist voting against the proposal. Completely irrational, but the reality is that people don’t always act rationally.
TMBR (or should I say TMBRQ) also comes to mind.
Didn’t get a 50% majority even after several extensions and even after TMBR said they would file for bankruptcy if not approved. Company indeed went bankrupt and was bought in bankruptcy by the same company that made the merger offer. Shareholders were wiped out and everybody lost.
Anger > being rational apparently.
The key difference between FRTX/TMBR and ASXC setups is size of the companies. FRTX/TMBR both had sub $10m market caps vs $85m for ASXC. So whatever is left of the original ASXC positions in investors’ portfolios, it should be more meaningful and hopefully will encourage higher participation.
I recall that in one or two SSI cases recently, companies resorted to making phone calls to shareholders for their votes.
Have anyone received calls from ASXC so far?
I received a call from AINC but have not received a call for ASXC
anyone has seen anything new on ASXC ? it seems the share price has just collapsed from 0.3 to 0.245 on no volume ?
Share price went as low as 0.17 around 12:44pm.
It’s possible that someone got a margin call and had to liquidate.
Despite being a penny stock and illiquid, maintenance margin requirement for ASXC is just 20% at IB.
Hi Snowball or anyone else:
Can you recall any other instance(s) of an arbitrary—perhaps margin call?—spike down like this in a similar type of special situation?…I am just looking for a precedent(s).
I assume in instances like this we’ll usually never know if it was a margin call / massive market sell order / stop losses triggering or cascading / or some other cause?
Thanks!
FWIW, at 6.3 million shares, only 2.3% of outstanding shares have changed hands today so far.
Unusually low turnover if the collapse is being driven by some new, material information.
it costs way less for a company to postpone the vote keeping the initial record date than changing the record date based on all the necessary SEC filings etc… so the company went that way first for sure as they are short only a few millions “YES” shares (19mln Yes shares are still needed based on their latest comment). I would encourage all of you to write to Investor Relations (“contact us” section) in their website letting them know that if they are still short votes, they should simply amend the record date instead of going bankrupt as they still have time (end of october outside date) and it’s august so a bit difficult to contact all the retail shareholders… i’ve done so yesterday. the more the merrier !
I wrote a message to IR highlighting the record date change possibility. I hope some people will follow this. Thanks for your input, much appreciated.
Other than the concern re record date change, have you guys heard any rumors related to yesterday’s sell off?
I believe the downside risk of bankruptcy/wipe-out (however small the probability is) is preventing many people from pulling the trigger, in particular for those with pre-existing large positions.
haven’t seen anything at all. i think it was simply flow driven and of course fear of a hidden news. and as you have said, not a lot of volume either.
It may sounds trite but to me it is always helpful to take a step back and consider one or two things:
1. It is between the two companies, nothing more, nothing less. There is no regulatory risk, no judge/court involved, no outside force other than disgruntled shareholders.
2. You still have 2 committed parties that BOTH want the deal happen. There is no buyers remorse, no sudden deterioration in the business, no suprises that one of the parties wants out or changed their mind.
To be clear, shareholder approval is still needed, it is not my intention to downplay that problem, BUT you have two parties that can work alongside, find creative solutions and work things out.
ASXC down again 6% OTH with little volume.. no update from the company yet
Any news on shareholder meeting with pop to 33c?
Well Nancy, I guess that the shareholder meeting not being adjourned could be positive signaling ;-) But currently I am just speculating.
Shareholder meeting started on 10am. Can those in the meeting room trade?
Merger Approved, no word on closing date in the 8K, posted below. Any ideas?
Merger Agreement Proposal. The stockholders voted to approve the proposal to approve and adopt the Agreement and Plan of Merger, dated as of June 6, 2024, by and among the Company, KARL STORZ Endoscopy-America, Inc., a California corporation (“Parent”), and Karl Storz California Inc., a California corporation (“Merger Sub”), pursuant to which the Company would be acquired by way of a merger with and into Merger Sub with the Company surviving the merger and becoming a wholly-owned subsidiary of Parent (the “Merger”).
It’s in the filing
The parties intend to close the Merger transaction on August 22, 2024.
nancy needs a new pair of glasses
The return today will pay for the glasses. ;-) Congratulations to all who sat tight!
Glad to see this merger arb playing out.
While I did not foresee that ASXC will face issues to collect shareholder votes, I think my arguments that Karl Storz is serious about this acquisition and will not walk away were spot on. 40% spread at the time of non-binding offer was market’s error.
Already in the preface of the proxy statement a key risk was listed: “we may fail to obtain stockholder approval of the merger agreement”. And mid July the company started mailing shareholders’ urgent messages’ to vote ( https://www.sec.gov/Archives/edgar/data/876378/000143774924022923/asxc20240717_defa14a.htm ) and releasing pressers encouraging shareholders to vote. The company had zero large shareholders. The past two years we’ve seen multiple instances of a company hitting rock bottom and failing to secure a vote for what is obviously the best outcome for shareholders (though this one was slightly larger than the others, I believe). And the downside was a hard zero here.
I’m not saying I saw the last minute panic coming, but this certainly was not an attractive hold when it was trading around $0.34 a few weeks ago.
Agree – thus my comment on Jun 8 after the binding agreement was signed and the spread narrowed from 40% to 5%. Proxy was issued only on June 24.
Having said that, the language in the proxy “we may fail to obtain stockholder approval of the merger agreement” seems to be a boilerplate template. I certainly did not pay any specific attention to it and I still do not think it reflected management thoughts on the likelihood of shareholder approval.
The only thing I thought after they struggled to get votes is that Storz might take the attitude “you can take a horse to water…” If shareholders were being so obtuse and/or willing to cut off their nose of to spite their face they might as well have let it run its course and picked it up cheaper in bankruptcy without having any malintent involved. Then again, maybe it is the responsibility of the ASXC board, and doesn’t involve Storz as much with regard to the process of garnering votes?
Overall, outstanding analysis of incentives (and as I think is often the case, micro cap merger arb being the better universe to play in).