An M&A Deal To Ponder: Foundry Buyout by Broacade
Here is an M&A deal I ran across and found interesting. It's the buyout of Foundry (FDRY) by Broacade (BRCD). The original offer price was revised down--this is a risk with the BCE buyout as well--and shareholders will be voting soon. You can get a newspaper update here.
This is a cash deal ($16.50 per share) and you are looking at around 14% return from today's prices on the cash portion. I'm not sure when the deal will close but I expect annualized returns to be fairly high.
This is a good risk arbitrage position to consider with one exception I will outline below. The good thing about this deal is that it is a strategic buyer (rather than a financial buyer) so the buyer has likely considered the benefits of acquiring Foundry. The deal was contemplated well into the credit crisis so this isn't one of those buyouts cut at the peak at ridiculous prices no one wants to pay. Shareholder vote is still uncertain but financing seems to be in place.
So what's the concern with this? Well, I am neither familiar with the companies nor the industry, but, looking at Yahoo Finance numbers, it looks as if Brocade is smaller than Foundry. Brocade with a market cap of around $1.5 billion (enterprise value of $800 million) is buying Foundry with a market cap of $2.1 billion (enterprise value $1.2b). The balance sheets of both companies are fairly clean--most tech companies rarely carry any debt--and it isn't as risky of a deal as it seems. Even though Brocade is supposed to be borrowing a billion, Foundry has one billion cash so that will be paid off easily (assuming the company doesn't bleed much red ink during the recession.)
This is a cash deal ($16.50 per share) and you are looking at around 14% return from today's prices on the cash portion. I'm not sure when the deal will close but I expect annualized returns to be fairly high.
This is a good risk arbitrage position to consider with one exception I will outline below. The good thing about this deal is that it is a strategic buyer (rather than a financial buyer) so the buyer has likely considered the benefits of acquiring Foundry. The deal was contemplated well into the credit crisis so this isn't one of those buyouts cut at the peak at ridiculous prices no one wants to pay. Shareholder vote is still uncertain but financing seems to be in place.
So what's the concern with this? Well, I am neither familiar with the companies nor the industry, but, looking at Yahoo Finance numbers, it looks as if Brocade is smaller than Foundry. Brocade with a market cap of around $1.5 billion (enterprise value of $800 million) is buying Foundry with a market cap of $2.1 billion (enterprise value $1.2b). The balance sheets of both companies are fairly clean--most tech companies rarely carry any debt--and it isn't as risky of a deal as it seems. Even though Brocade is supposed to be borrowing a billion, Foundry has one billion cash so that will be paid off easily (assuming the company doesn't bleed much red ink during the recession.)
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