McAfee shares jumped around 20% today (11/5) based on the media reporting a buyout by a private equity consortium. The reports state that the deal is going to be worth $15 billion. Their current debt outstanding is $4 billion. Hence, the offered equity valuation comes out to be $11 billion.
Given that they have 434 million shares outstanding and their current share price is $25.46, their market cap comes out to be $11 billion as well.
My question is that as far as I know when an acquisition is announced, the stock price trades at a discount to the proposed offered price (to price in the risk of the deal not going through). In this case, the stock price is trading exactly at the level of the offered price ($11 billion offered equity valuation vs $11 billion current market cap).
I was curious what factors have led to such a situation occurring or is their problem in the math I did above?
Since nobody else has answer: I don’t know anything about this particular deal and I don’t work in merger arb so I can’t give the most elegant of answers. But generally speaking, the price post announcement will be a function of a number of factors, three of which include certainty of close (as you mentioned), time to close, and ultimate purchase price.
Certainly of close— higher the certainty, the smaller the discount. Maybe investors are nearly certain this will close because they know the PE sponsor is sitting on a huge cash pile, dying to invest.
Time to close— simply put, time value of money. The quick the deal closes, the smaller the discount.
Ultimate purchase price— just because it’s reported that the deal will be worth $15 mil doesn’t mean that’s what it ultimately will be. Investors might urge the acquirer to pay more, or they might expect a bidding war.
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