Market rout throws off math for open deals

3 minute read

SpaceX owner and Tesla CEO Elon Musk grimaces after arriving on the red carpet for the Axel Springer award in Berlin, Germany, December 1, 2020.

Register now for FREE unlimited access to

NEW YORK, May 19 (Reuters Breakingviews) - Stock prices aren’t always reliable measures of how likely deals are to get done. While Twitter (TWTR.N) shares sink on each new broadside read more from putative $44 billion buyer Elon Musk, many companies subject to offers have seen their stocks slide on little news. A tumultuous market means takeover targets’ shares may have further to fall if they’re left at the altar. Even if the odds of a deal going ahead haven’t changed, arbitrageurs need to factor that in.

Look at video-game publisher Activision Blizzard (ATVI.O), awaiting approval for its $69 billion sale read more to Microsoft (MSFT.O). Investors must price in the risk that merger-phobic regulators block the deal. But that risk hasn’t really changed since the tie-up’s announcement, while Activision’s shares have trended downwards. What has changed is the carnage in the stock market.

Here's how the math works. Arbitrage-focused hedge funds look to balance the probability a deal will close – and the payoff they’ll receive if it does – against where a stock would probably trade if the takeover fails. Microsoft is offering $95 per share for Activision. The stock closed at $65.39 before the transaction became public. Assuming Activision fell back to that price if regulators block the merger, its closing price of $78.54 on Tuesday implies that the market assigns only a 44% chance of closing.

Register now for FREE unlimited access to

But Activision shares would drop a lot further if the deal breaks, because technology stocks have fallen since the January announcement. The MVIS Global Video Gaming & eSports Index is down nearly 19% since then. Assuming Activision’s shares would have tracked the index, the implied probability of the deal closing is 61%, according to a new Breakingviews calculator. On the day of the announcement, Activision’s closing price of $82.31 implied a 57% likelihood of success. In other words, the implied chances of the deal going ahead have slightly improved.

Not so for Twitter. Even considering the nearly 25% decline in the Dow Jones Internet Index since just before Musk made his investment in the company public ahead of announcing his $54.20-a-share offer, its Tuesday closing price of $38.32 implies only around 36% odds that the deal will close. That may even be optimistic: One possibility is that Twitter accepts a lower bid. But spreads have widened on a bevy of deals with blue-chip buyers that should follow a clear-cut path, like SailPoint Technologies’ (SAIL.N) $6.9 billion sale to Thoma Bravo. Those moves may be about increasing risks to investors, rather than the deals themselves.

Follow @JMAGuilford on Twitter

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own/)

Run the numbers

Tech Arb Calculator


- Activision Blizzard agreed to sell itself to Microsoft on Jan. 18 for $95 per share in a $69 billion all-cash deal. Shares in the video-game publisher have persistently traded below the deal price, partly reflecting the risk that U.S. antitrust authorities will not approve the transaction. The gap between Activision’s trading price and the deal price has widened, from as little as 8.5% on the day of the deal’s announcement to around 17% on May 17.

- Since the two companies agreed to a deal, the MVIS Global Video Gaming & eSports Index is down almost 19%.

- Tesla Chief Executive Elon Musk reached an agreement to acquire Twitter on April 25 for $54.20 a share, in a deal that values the social network at $44 billion. The billionaire has since expressed doubt about Twitter’s business, saying that the deal is on hold until the number of bots on the service can be independently verified.

Register now for FREE unlimited access to
Editing by Peter Thal Larsen and Sharon Lam

Our Standards: The Thomson Reuters Trust Principles.

Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.