Shares of Versum Materials (NYSE: VSM) rose more than 18% today after it confirmed that German materials behemoth Merck KGaA (NASDAQOTH: MKGAY) was interested in acquiring the basic materials manufacturer. The proposed acquisition would occur for $48 per share, but the stock rose above that price. It turns out there's a good reason for overshooting the proposed acquisition value.
At the end of January, Versum Materials agreed to merge with Entegris (NASDAQ: ENTG). The "merger of equals" promised to create a $9 billion materials company with a significant market share in the semiconductor industry. That deal was valued at around $35 per share. Now that Merck KGaA is interested, investors think a bidding war could erupt, or that they'll end up with considerably more cash.
As of 2:45 p.m. EST, the stock had settled to a 17.8% gain.
Image source: Getty Images.
Having multiple suitors interested in an acquisition certainly isn't bad news for Versum Materials. Whether a bidding war will ensue is up for debate, however.
The materials business delivered solid fiscal first-quarter 2019 operating results, including an operating margin of 20%, but the basic materials sector is relatively slow growing. Versum Materials expects full-year 2019 revenue to grow just 1% to 4% year over year, while adjusted EBITDA could grow as much as 4% to 9% compared to 2018.
That type of growth could make it difficult for Entegris or Merck KGaA to justify overpaying for Versum Materials. Will Entegris be willing to up its original offer, which was going to be paid in common stock? Based on today's share price, the company would need to offer 20% more shares just to match the offer from Merck KGaA.
Versum Materials issued a statement saying its board of directors still believed in the value of the Entegris merger of equals but had a fiduciary duty to evaluate the proposal from Merck KGaA. Considering the massive premium offered by the German conglomerate compared to the original merger with Entegris, shareholders might rather have the company pursue the latest offer. Investors will simply have to wait to see how the situation shakes out, but this should be good news for existing shareholders.
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