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Could the Baxalta and Shire Merger Get Competitive?

Baxalta and Shire Finally Ink a Deal

(Continued from Prior Part)

Competitive deals can make your quarter

Competitive deals can make your quarter if you’re a merger arbitrage professional. If you get two companies bidding against each other, a 1% gross spread can easily become a 10% gross spread by the time everything is said and done. We saw that happen in the Salix Pharmaceuticals deal.

Shire’s price fall could attract other suitors

Shire’s (SHPG) stock price got hammered on the announcement of the deal, although stocks have been heavy lately. There has been a lot of merger activity in the pharma space lately, and you could see a handful of large pharma companies interested in a deal. That said, the tax efficiency of transaction will be hard for other buyers to overcome.

Deal comparisons

Arbitrageurs often compare the price the acquirer is paying to the prices of other deals in the same industry. This is always more art than science since no two companies are alike, and interest rate environments change. The best comparisons for this transaction include:

  • Allergan and Pfizer

  • Forest Labs and Allergan

  • Schering and Merck

These transactions are the closest deals to the Baxalta (BXLT) and Shire merger. That said, some of these companies had different growth rates, so making comparisons is difficult.

In this transaction, Shire is paying about 5.8x revenues and 17x EBITDA (earnings before interest, tax, depreciation, and amortization). Both multiples are low compared to the deal comps, but comps are very difficult with pharma companies because pipelines can be vastly different.

Other merger arbitrage resources

Other important merger spreads include the Cigna (CI) and Anthem (ANTM) deal, slated to close in the second half of 2015. For a primer on risk arbitrage investing, read Merger arbitrage must-knows: A key guide for investors.

Investors who are interested in trading in the healthcare sector could look at the S&P SPDR Healthcare ETF (XLV).

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