Stock Trades Above its Acquisition Price?
Hey guys, I've been trying to test out a merger arb strategy (not sure if I can actually call it that since I'm in college and probably have no idea what I'm doing) when I came across Thoughtworks Holding, Inc. (NasdaqGS: TWKS) which was trading today between $4.42-$4.43/share, despite the company announcing that it would be acquired at $4.40/share (in cash) a couple months ago.
Is the market just saying that if the acquisition falls through that they expect TWKS to trade above $4.40/share, or is there something more complex here? When the acquisition was announced (August 5, 2024), the acquisition price was at a 30% premium to the last closing price and a 48% premium to the 30-day VWAP, and the fundamentals of the company aren't great (declining margins, stagnant revenues over the past 4 years, plus multiples are still higher than competitors at current price, and yet is trading at 1.96x P/BV and a negative P/Tangible BV), so I'm unsure if traders really value the company 30% higher now (or maybe expect a higher bidder to come in?).
Sorry for the dumb questions, I was just curious if anyone who had actual merger arb experience has ever encountered something like this before, and if my intuition about the pricing is correct or if there's an actual arb opportunity here if I can manage to hedge away the downside risk (big IF)? And thank you so much if you took the time to read this or answered as well (I really really appreciate it)!
(One last thing that really threw me off was that the stock has only traded between $4.38-$4.43 (basically a 1% band) for the past month which I thought was really strange and which is what led me to think that maybe something else is going on here. Thank you so so much again for reading all of this).
Not intimately familiar with this exact situation, but yeah you're on the right track-- the market expects a bump in the bid. It appears they're being acquired by Apax, who already owns 60%+ of the company. This is commonly referred to as a minority squeeze out and given that Apax controls the company and thus the board, can introduce some grey-area legal issues regarding the company's duty to minority shareholders. These sometimes lead to increase bids to placate minority holders who might otherwise think they're getting an unfair deal. Combine a slight chance of a bump + the fact the deal is slated to close within the next two months (less time = higher IRR) provides a fine reason to trade above sticker price. If someone has been watching this particular situation more closely and has something to add, please do, but expecting a bump in the bid is the most common (but not only) reason that a stock would trade above acquisition price.
Arb here, very good answer.
Look at EDR for another example of a stock “trading through”… don’t want to spoil the story but that one is interesting (look at who owns TKO class Bs and how much TKO has appreciated since EDR deal announced)
Another example is DIVIDENDS (most of the time in a cash deal) (look at AAN chart on a 10.10 deal price, deal just closed, traded 10.12 on 9/12)
Not uncommon that shorts covering right before close push the stock above deal price too.
Probably forgot a few fun situations like this recently, other arbs jump in!
Good question and answer!
Thank you so much!
Since most of the short interest that exited did so in August and September, is it safe to assume that most of the current price action is a result of shares being bought by merger arb/special sit funds (e.g. Water Island Capital in August and probably other funds who's names I couldn't find through my school's Bloomberg)?
I'll make sure to keep checking out the other examples you gave as well, so thank you for those! (I took a quick look at the EDR/Silverlake deal but didn't have enough time to dive in-depth today)
Also if you have the time to answer one more question, do you have any explanation for SocGen's purchase of 3m shares in Q3 in the screenshot above (Since trading volume is way higher post-announcement I'm assuming that this entire stake was bought after the August 5 announcement)? Would a bank like SocGen be doing merger arb themselves, or could they be buying these shares to hedge against derivatives they issued, or buying for a client who wants to hide their stake?
Cheers and thank you so much again!
Yes to the first question about arbs/special sits fund buying and driving the price through the deal terms.
For the second question, (this is not my area of expertise, others might opine) it is more than likely that SocGen owns those shares in SWAP for an arb side somewhere. Not a lot of banks have an actual desk anymore from my understanding. A couple do, not sure if SocGen has a team actually taking risk.
My thoughts would be
1. SocGen is French
2. There are some French based arb shops
3. French arb guys probably have relations with French bank as a Prime Broker (PB) and they own it in swap for tax purposes/to not disclose their position.
I don’t know anything about French arb shops, but Google “Puzzle Capital Arb”. I remember watching a video on them a long time ago on YouTube, and I think the guys were French. Maybe it’s them - we will never know!
Thank you again! Have a great weekend!
You too. Keep working hard and asking good questions and you’ll go places.
Some great answers here from arb specialists. I would also say from experience that merger arb is absolutely a space where you DON'T want to be a tourist.. there's a limited amount of situations where the ninjas are laser-focused on them.. if you are not a specialist, you are the dumb guy at the table (been there myself even in situations where I had sector expertise).
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