Since Microsoft’s announced takeover of LinkedIn, LinkedIn’s stock has fallen $6 below the software giant’s $196/share offer over concerns of EU regulatory approval. But the likelihood of the EU blocking the deal—which has already been approved by US, Canadian, and Brazilian regulators and the Board of both companies—is remote. In fact, the only example I could find of the EU blocking a merger between two US companies was in 2001, when GE tried to acquire Honeywell for $42b. Since then, the EU has neither blocked a merger between two US companies, nor have they ruled against a deal already approved by US regulators. And there have been no indications that they intend to block the MSFT-LNKD acquisition. This has created a nice little arb opportunity for investors.
If the deal does close in December as is expected, investors would earn a respectable 12% annualized return ([$6/$190]*4). But there’s also a good chance the deal closes earlier, as the EU is expected to decide between Nov 22 - Dec 6. If they rule in favor of the acquisition early in that range, investor’s would nearly double their return. Using conservative assumptions of a 5% chance of the deal falling through, and that upon such news LinkedIn were to drop by ~$100/share, the expected value is still +.70; thus signaling a buy.
($6 * .95)+(-$100 * .05) = .70
Investors also have downside protection, stemming from Salesforce’s interest in acquiring LNKD. The enterprise software company has made no secret that it covets LinkedIn above all other acquisition targets, lobbying both LinkedIn and regulators in repeated attempts to thwart the deal. Now that they’ve passed on buying Twitter, Salesforce would presumably be waiting in the wings were MSFT’s acquisition to fall through. And even in the worst case scenario, where the MSFT deal is blocked by regulators and then Salesforce chooses not to pursue LinkedIn, investors have yet another layer of protection in the form of LinkedIn’s viable—albeit overvalued—business.
Despite LNKD’s huge stock option expenses, a management team that flouts GAAP accounting, nonexistent profits, and a poor M&A track record, Microsoft is confident that they can harvest enough “mobile enterprise big data social graph cloud synergies” to make their largest ever acquisition pay off. And while it’s hard to argue that LinkedIn was a compelling investment prior to Microsoft’s takeover offer, the merits of the business are of little consequence in this scenario. All that really matters—at least for LNKD shareholders—is if the deal will close by December; and it seems very likely it will.
No deal is guaranteed until the ink is dry, but there has been no evidence the EU will try to block MSFT’s acquisition of LNKD for $196/share. Investors can now scoop up LNKD for a 3% discount to MSFT’s offer, which is not commensurate to the risk of the deal falling apart, nor the downside protection afforded by Salesforce and LNKD’s operating business. This has created a compelling and straightforward opportunity for investors to earn 12%.
Less than a month later, I sold my position in LinkedIn at $193.90 for a 2.9% gain over my $188.53 entry price—equivalent to ~35% annualized.