Notes from the Desk: Topping Bids Emerge
In prior commentary, we have often mentioned how mergers and acquisitions (M&A) activity can experience an increase in competitive or topping bids in periods following a market downturn. Intuitively, this makes sense – after a period in which asset prices are depressed, stronger players can find opportunities to take out their weaker peers, and deals can often be had even if one must outbid a competitor or raise one’s offer in response to shareholders agitating for a better price. Furthermore, situations like these are more likely when acquirers have different views of the market. One company may be more optimistic about the prospects for a recovery – economic, from a pandemic, or otherwise – while another may be factoring more risks or bad outcomes into their valuation of the target. In 2009 – the year immediately following the Global Financial Crisis – no fewer than 16% of completed deals targeting public companies valued at $500 million or greater experienced an increased bid, whether from a competing bidder or a bump in terms from the original acquirer, according to FactSet data. That marked the highest share of competing or topping bid situations of any year in the past two decades, and more than 35% higher than the average.
In 2021, we have begun to witness a similar trend unfold. Through April 30, the share of completed transactions that experienced a competing or topping bid was nearly 20% higher than the average – including the acquisition of Acacia Communications by Cisco Systems, which increased its own offer by more than 60%, to $5.0 billion from $3.1 billion, in order to prevent Acacia from walking away after delays in the regulatory review process caused the original deal to arrive at its termination date without all required approvals. After the companies agreed to renegotiated terms, the deal eventually received all outstanding regulatory approvals and closed successfully in March. In addition, several more still-pending transactions experienced increased offers through competitive bids or bumps in consideration in 2021. At the close of Q1, the Arbitrage Fund held positions in a dozen different pending M&A transactions that had seen their consideration revised higher, with one target (Coherent) having received nine separate rounds of bids from three competing acquirers.
Arbitrage Fund: Competitive/Topping Bidding Situations Held as of Quarter-End
| Target | Target Ticker | Position Size | Original Offer | Revised Offer | Change in Offer |
| Aegion Corp | AEGN | 1.3% | $26.00 | $30.00 | +15% |
| CA Immobilien Anlagen AG | CAI AV | 0.6% | €34.40 | €36.00 | +5% |
| Cardtronics PLC | CATM | 2.5% | $35.00 | $39.00 | +11% |
| Coherent Inc | COHR | 3.5% | $212.11 | $282.22 | +33% |
| CoreLogic Inc | CLGX | 0.6% | $66.00 | $80.00 | +21% |
| Cubic Corp | CUB | 2.3% | $70.00 | $75.00 | +7% |
| Natixis SA | KN FP | 0.4% | €3.94 | €4.00 | +2% |
| Kansas City Southern | KSU | 1.0% | $208.00 | $276.69 | +33% |
| Pluralsight Inc | PS | 3.3% | $20.26 | $22.50 | +11% |
| Scapa Group PLC | SCPA LN | 0.4% | £2.10 | £2.15 | +2% |
| Signature Aviation PLC | SIG LN | 0.4% | $5.50 | $5.62 | +2% |
| Tikkurila Oyj | TIK1V FH | 1.1% | €25.00 | €34.00 | +36% |
As of March 31, 2021. Source: Water Island Capital, Bloomberg, FactSet. Position size represents percent of net assets. Revised offer represents the prevailing bid accepted by the target as of March 31. Offers represent price per share in local currency.
As we saw in 2009, a higher-than-normal share of multiple bid scenarios – particularly in the absence of an increase in broken deals – has the potential to act as a tailwind for merger arbitrage returns. Topping bids are already contributing to the fund’s performance this year, as the aforementioned Acacia and Coherent deals were the Arbitrage Fund’s top contributors during the first quarter. Given the current market environment, we expect no shortage of opportunities for acquirers to disagree on valuation – which could lead to additional bidding wars and provide further opportunities for the fund to generate non-correlated returns for investors.
Commentary represents the manager’s opinion and may contain certain forward-looking statements which may be different than actual future results, is subject to change, and is under no obligation to be updated. Commentary should not be regarded as investment advice or a recommendation of any security or strategy. Investing involves risk, including loss of principal. Past performance is not indicative of future results. View top ten holdings.