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Why the government could torpedo the Covidien-Medtronic deal

Brent Nyitray, CFA, MBA

Key overview: Merger arbitrage and the Covidien-Medtronic deal (Part 10 of 10)

(Continued from Part 9)

The President has got a pen and a phone

Frustrated by his inability to get anything done legislatively through Congress, the President has said he will go at it alone and get done what he can through the powers of his office. For example, in lieu of climate change legislation, the President decided to have the EPA impose new standards on power plants. He’s also active on the social side of things. The President is a left-wing populist at heart, and tax inversion trades almost certainly rub him the wrong way. In some ways, it’s surprising that the companies even mentioned the tax rationale for the deal—better to downplay that part of it as opposed to sticking your head over the parapet.

So, even though there’s almost no chance of a legislative initiative to prevent the deal, there’s still the possibility that the government could torpedo the COV-MDT deal. How?

First, the government could take an extraordinarily tough line on antitrust and tell the companies that the overlap is “unfixable.” Of course, this would be a lie, but they could do it. The companies would then have to go to court to get a judge to allow the deal through. The government has lost antitrust cases in court, so this isn’t as remote as it sounds. Case in point: the Wild Oats–Whole Foods (WFM) deal. The government blocked the deal and lost in court.

Second, the SEC could drag its feet approving the proxy. There’s a drop-dead date of March 2015 that can extend for another three months. The SEC could simply keep sending the proxy statement back with comments and push the timeline through the drop-dead date.

If the government wanted to get vicious, it could have the IRS make a mountain out of some molehill tax dispute, or even bring out the heavy artillery and get the FDA involved. My point is that if the government really wants this deal to break, it has the wherewithal to do it.

That’s what the wide spread is telling you. Be careful with this one.

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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