Guest Pitch: LivePerson (LPSN)

Merger arbitrage: 18% upside (at $2.82/share)

This idea was shared by Tom.

SOUN’s buyout of LPSN offers an 18% gross spread on a deal that could close in the next ten days. The spread is wide for a few reasons. This is a rescue takeover, the stock consideration is variable rather than fixed, and hedging it is awkward. On top of that, the approval timeline is uncertain, as LPSN’s register is mostly passive retail, which makes it difficult to hit the turnout threshold. However, the shortfall is really small. LPSN needs just another 2% of shares to vote, and the meeting is set for September 2. This arb works out if the vote passes with no further delays, and the deal closes shortly after that.

LPSN develops digital conversation software for large enterprises, including customer-service chat and automated WhatsApp messaging. It is the software behind the “chat with us” button and the automated text replies you get on company websites. The business is being disrupted by AI, with revenues and profitability in free fall. To save what is left, LPSN agreed to sell to SoundHound AI, which builds voice AI that lets people talk to machines in drive-thrus, on phone lines, through TVs, etc. Consideration is $3.33 per LPSN share in SOUN stock, subject to a certain collar and other conditions, but I’ll go into those a bit later.

The key point is that the merger itself is highly likely to close. The only remaining condition is LPSN shareholder approval. The meeting was already held on the 20th of August, and over 97% of the participating votes were cast in favor. The condition, however, is approval from a majority of shares outstanding, and only 49.07% of shares participated. In other words, the vote would have passed if another ~2% of shares had shown up and voted yes. The meeting was adjourned to the 2nd of September, and management has ramped up outreach to the remaining holders.

Importantly, this is not a case of shareholders objecting to the deal. It’s just that LPSN is a micro-cap with a large, passive retail investor base. Plenty of other micro-caps have run into the same problem. Asensus Surgical is a close parallel. It was another small-cap rescue takeover that failed its first vote on low turnout. Only 55% of Asensus shares showed up, and while 80% of those voted in favor, that came to just 44% of total shares outstanding supporting the deal. So Asensus was further from the threshold than LPSN is now. Management reached out to the missing holders and got the vote over the line in 13 days. The merger closed a few days after the vote.

LPSN has given itself the same window and starts from a much smaller gap, so the September 2 meeting should pass.

The record date hasn’t been changed. It’s still the 6th of July, so management can only work with the shareholder base as it stood then. The shortfall can’t simply be fixed by a large holder buying more shares in the open market today, since those shares carry no vote at the upcoming meeting. Moving the record date will be possible eventually, but it would require a further extension of the timeline. Hopefully, it doesn’t come to that.

The merger is being completed alongside a restructuring of roughly $350 million of LPSN secured debt (versus $43 million equity consideration). Creditors have agreed to extinguish that debt largely in exchange for SOUN shares, at a 20% to 30% discount to par. The merger and the restructuring depend on one another, so shareholders and creditors are both pushing in the same direction.

The strategic review left no alternative for LPSN. LPSN ran a process before this, with 17 parties signing NDAs and none besides SOUN making a bid. Houlihan Lokey valued LPSN’s standalone enterprise value at $120-188 million against $350+ million of debt, meaning that absent this deal the equity would eventually be worth zero. The stock consideration on offer is effectively a gift from creditors, who are incentivized to push the merger through quickly and collect 70-80% of par. If the merger breaks somehow, the loss for LPSN holders would be massive. The probability of this seems very low, however.

SoundHound is unlikely to try to derail this deal. It’s a $3 billion market cap company that went public via SPAC in 2022, then became a meme stock in 2024, spiking 4x after appearing in Nvidia’s 13F. Today it’s an AI story stock, and LPSN is its fifth acquisition in recent years. The strategic logic fits neatly — voice software combined with text. SOUN also picks up LPSN’s large customer base, which I suspect is the real point of the deal, and can cross-sell into it. LPSN management has said voice was the single most requested feature from its own customers. Besides that, SOUN needs to keep the story going, and this merger does that.

That covers why this ultimately closes. The harder question is what you actually receive and how to hedge it.

 

Deal structure and hedging

The merger consideration is structured with a collar on SOUN’s share price. Here’s how it works:

• SOUN between $7 and $12: the exchange ratio adjusts so that each LPSN share receives a fixed $3.33 in value, sliding from 0.4757 SOUN shares at $7 down to 0.2775 at $12.
• SOUN below $7: the ratio locks at 0.4757.
• SOUN above $12: the ratio locks at 0.2775.

The reference price for SOUN is a VWAP over the 10 consecutive trading days ending on the third trading day before closing.

Because the exchange ratio is variable, hedging is awkward. The uncertain timeline doesn’t help, as any further delay to the vote means more exposure to SOUN’s volatility. SOUN is one of the most shorted names on the market, with roughly 40% of the float short (so there’s some risk of a random squeeze). Borrow rates have also been jumpy (4% today, 13% a month ago), though over a timeline this brief that probably doesn’t matter much.

However, if I’m right and the vote clears on September 2 with closing a couple of days later, the visibility here is much better than it looks. In that scenario the VWAP window is already running, from August 19 to September 1, so 8 of the 10 days are in the books. SOUN has been fairly stable through them, and the implied VWAP from those 8 days is $7.12, basically the same as the current share price. That puts the implied exchange ratio at 0.468, which is the ratio I’m hedging at.

You can take the more conservative view and assume the deal closes a week out, on September 9. That would put 6 of 10 measurement days in the books (September 7 is Labor Day), with an implied VWAP of $7.14/share.

Either way, we should know soon. Voting results should be announced on September 2. If the vote passes, management will likely give a closing date at that point, and I will adjust my hedge ratio accordingly. That adjustment should be minimal and would fully eliminate any remaining SOUN price volatility exposure until the consideration is received.

 

A few more things

The main risk is that the vote fails again and the meeting is moved to a later date. In that case LPSN would likely trade down. However, I don’t expect the slide to be massive, as ultimately it would just be another delay of 2-3 weeks. The clean fix for the vote would be moving the record date, but, as I understand, that requires adjourning the vote 30 days past the original meeting date, which management has wanted to avoid so far. But if the Sep 2 vote fell short, they’d probably go for the record date reset and close the merger at the end of September.

The total equity consideration ($42.8 million) gets reduced dollar-for-dollar if LPSN’s adjusted closing cash falls below the minimum threshold. By my calculations, LPSN has about $14 million of headroom to absorb any cash burn between Q2 and closing, as well as any further transaction expenses beyond the $13 million that has already been accrued. The company isn’t burning cash, so it seems that any risk from this condition is low. Excess cash above the minimum threshold will be paid to LPSN creditors.

Debtholders receive their SOUN consideration on the day the merger closes. That consideration is subject to a $7-12 collar and, at the current price, would amount to roughly 9% of SOUN’s shares outstanding. I wouldn’t be surprised if they dumped those shares right after that. Probably a part of that consideration is already hedged, but there’s still a chance that SOUN volatility increases after the LPSN shareholder vote is done.