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Lexmark Gets a Buyer after a Long Sales Process

Brent Nyitray, CFA, MBA

Lexmark Gets a Buyer after a Long Sales Process

Merger arbitrage

In merger arbitrage, an investor generally buys the stock of the company being acquired, short sells the relevant ratio of the acquirer’s stock if applicable, and waits for the deal to close. When the merger is complete, the investor exchanges the stock of the company being acquired for the amount agreed on in the deal.

Culmination of a long sale process

On April 19, Lexmark announced that it sold itself to a consortium of investors for $40.50 in cash. The investor group includes Apex Technology, PAG Asia, and Legend Capital Management. The equity value of the deal is ~$2.6 billion and includes another $1 billion of net debt. The purchase price is a 30% premium to Lexmark’s closing price on October 21. The company examined its strategic alternatives the day before the sale.

The transaction is the result of a six-month process where the board of directors examined strategic alternatives in order to maximize shareholder value. They clearly ran an auction process. This should mean that there aren’t any other possible bidders. That said, Starwood ran a process and ended up with Anbang as an interloper.

The company will maintain its headquarters in Kentucky. Paul Rooke, chairman and CEO, will continue to run the company. Assuming a conservative five-month timeline, the deal is trading at an annualized spread of 21%.

Merger arbitrage resources

Other important merger spreads include the deal between Cigna (CI) and Anthem (ANTM) and KLA-Tencor (KLAC) and Lam Research (LRCX). 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 tech sector can look at the iShares Global Technology ETF (IXN).

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