Key overview: Merger arbitrage and the Covidien-Medtronic deal (Part 9 of 10)
What’s the spread telling you?
The MDT-COV spread tells you there’s a big risk on this deal, and this is it: the political risk. Arbs hate political risk because it’s completely unmodelable. If there’s an antitrust question, the arbs will calculate the areas of overlap, determine whether the numbers can get past the regulators, and figure out the alternatives and whether they’re deal-killers. Antitrust regulators generally don’t surprise, or at least arbs know going into it whether there’s a big problem and where it is. They will call the companies and try and flesh out the buyer’s body language to see if they’re willing to do what it takes to get the deal through the regulators.
The political risk
This deal is fundamentally a tax inversion trade, and tax inversion trades are unpopular in Washington—especially with the left. As soon as the deal was announced, the usual suspects were writing columns and speaking on camera about companies paying their “fair share” and complaining about how the U.S. gives “tax breaks to companies that send jobs overseas.” Regardless of the hyperbole here, the left is on the warpath against companies that do this sort of deal.
Gridlock rules the day
Even the left realizes that our corporate tax system is broken. At the end of the day, our corporate taxes are much higher than our competitors’, and as a result (surprise, surprise) companies are choosing to do their fiduciary duty and maximize value for shareholders by doing these sorts of transactions. There is general agreement in Washington that the tax code has to change and expect to see lower rates in exchange for less deductions. At the moment, there’s almost no chance of a legislative change that could torpedo the deal. Ahead of the midterm elections, no one expects anything to be done.
Other merger arbitrage resources
You can find Market Realist’s primer on merger arbitrage analysis here.
Other important merger spreads include Time Warner (TWC) and Comcast (CMCSA) as well as DIRECTV (DTV) and AT&T (T).
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