Is Zynga Warren Buffett’s Next Merger Arbitrage Play?
Recently, Chairman and CEO Warren Buffett of Berkshire Hathaway (BRK.A -2.62%)(BRK.B -2.48%)a $705 billion holding company that owns a diversified portfolio of companies and stocks, announced a merger arbitrage play with ActivisionBlizzard (NASDAQ: ATVI), a video game publisher. Merger arbitrage is a short-term investment strategy of buying shares of companies trading below their acquisition price. And despite being known as a long-term investor, Buffett has been involved in merger arbitrage for more than 30 years.
Activision Blizzard isn’t the only merger arbitrage available in public markets today. Stay in the video game space, Take-Two interactive software (TTWO -3.63%)a video game holding company, plans to acquire a mobile and social video game developer Zynga (ZNGA -2.12%) during Take-Two’s first quarter of fiscal 2023, ending June 30, 2022. And while there seems to be a juicy game of merger arbitrage on the surface, there’s more than meets the eye. it seems.
Is Zynga a worthy merger arbitrage game?
When Take-Two announced the acquisition in early January, the video game company expected to pay a total value of $9.86 per Zynga share, consisting of $3.50 in cash and $6.36 in Take common stock. -Two, valuing Zynga’s enterprise value at $12.7 billion. With Zynga recently trading at $8.32 per share at Thursday’s close, the “spread,” or the percentage between the stock price and the buyout price, would be 16%.
However, the ad contained fine print that could depress the price if Take-Two’s per-share price fell below a certain threshold. Specifically, the agreement provided that if Take-Two’s 20-day volume-weighted average (“VWAP”) price ending on the third trading day before the close was below $156.50 at 181.88 $, then the exchange ratio would be 0.0406 Take-Two shares for each Zynga Share.
And Take-Two’s 20-day VWAP on the third trading day before May 4, 2022 was below the specified range at $139.19. Therefore, the exchange ratio would translate to $5.65 in common stock of Take-Two. Coupled with the $3.50 in cash, Zynga shareholders would receive $9.15 per share. As a result, Zynga’s real spread is less attractive at 9.1%. Additionally, shares of Take-Two recently fell to $121 per share, meaning the 20-day VWAP is likely to fall further.
The Story of Warren Buffett’s Merger Arbitrage
In 2018 and 2019, Warren Buffett made a play of merger arbitrage after IBM announced that it would acquire Red Hat at $190 per share. Additionally, in 2017 and 2018, Berkshire regularly bought Monsanto Co. stock for more than a year after Bayer AG announced that it would buy the company.
Notably, in all three cases, the acquiring company paid all of the cash for the acquired company. At Berkshire’s last annual meeting, Buffett noted how these well-established companies have created an inordinate “gap”, the percentage between the share price and the buyout price, due to regulatory risks. However, no one feared that the acquiring company could afford the price.
Are there other merger arbitrations available?
While Buffett is unlikely to participate in the Zynga merger arbitrage as it is not an all-cash deal and the spread fluctuates daily, there are other opportunities. Most notably, Elon Musk announced his intention to acquire Twitter (NYSE: TWTR) at $54.20 per share in an all-cash transaction, creating a spread of about 11% based on its recent price of $48.87. Additionally, the private equity giant Apollo Fund plans to acquire auto parts manufacturer Tenneco (NYSE:TEN) at $20.00 in an all-cash trade, which is about a 20% spread based on its recent price of $16.09.
As mentioned, but it bears repeating: all acquisitions must pass regulatory approval in the United States and the European Union. For the past two years, regulators have taken legal action to block the computer chipmaker Nvidia of the acquisition of British technology provider Arm and Visathe acquisition of Plaid for antitrust reasons. Still, merger arbitrage can be a rewarding investment strategy. Ask Warren Buffett.