As mentioned in the previous article, mergers are subject to an eclectic variety of risks: earnings risk, financing risk and legal risk. Although a merger may have a strong strategic rationale and target performance, the deal can still fail due to timing and legal issues. Such drawbacks resulted in two of the major merger failures this year.
NextEra Energy-Hawaiian Electric merger fails after seven-month delay
On Dec. 3, 2014, NextEra Energy Inc. (NEE, Financial) announced a definitive merger announcement to acquire Hawaiian Electric Industries Inc. (HE, Financial). In its current report filing with the Securities and Exchange Commission, NextEra lists several customary conditions, including approvals from 75% of Hawaiian Electric’s shareholders, the Hawaii Public Utility Commission, the Federal Energy Regulatory Commission and the Federal Communications Commission. Due to the long list of approvals, the NextEra Energy-Hawaiian Electric merger potentially has high legal risk.
Initially, the deal appears to be a success. Throughout 2015, the Federal Energy Regulatory Commission and the Federal Communications Commission approved the merger. Additionally, support for the merger increased to over 100 Hawaiian-based organizations by May 2, according to a press release. However, based on information presented in the merger announcement, the merger was expected to close December 2015, five months earlier. Finally, on July 15, about seven months after the expected closing date, the Hawaii Public Utility Commission dismissed the merger application. NextEra terminated the merger the next day and reported it to the SEC in its July 18 8-K filing.
The John Paulson’s Merger Arbitrage Checklist scores this merger 3.4 out of 5. Both the “Definite Agreement” and “Strategic Rationale” criteria receive a rating of 5 based on the merger announcement. However, the “Limited Regulatory Risk” criterion gets a 1, the worst score, due to the long list of approvals.
Antitrust committees bring down Staples-Office Depot merger
Staples Inc. (SPLS, Financial) announced a definitive merger announcement to acquire Office Depot Inc. (ODP, Financial) Feb. 4, 2015, as mentioned in its 8-K filing with the SEC. This filing highlights one potential legal risk: the merger is “subject to customary closing conditions, including antitrust regulatory approval.” Although the Commerce Commission of New Zealand and the Australian Competition and Consumer Commission approved the merger, the U.S. Federal Trade Commission attempted to block the merger Dec. 7, 2015.
Early this year, the two office supplier companies contested the FTC’s attempt to block the merger. The companies extended their merger deal Feb. 2, and the European Union approved the merger eight days later. However, the final blow happened May 16 when the U.S. District Court in Washington, D.C., granted the FTC’s request for preliminary injunction to block the merger. The two companies terminated their merger following the decision.
The 'Checklist' feature allows users to find good stocks
One of the major GuruFocus features is the “Investment Checklist,” which allows users to evaluate a stock based on nonfinancial criteria. (For financial criteria, use the All-in-One Guru Screener.) The default checklist has criteria based on general factors: circle of competence, favorable macroeconomic factors, guru and insider buys and anything that might increase the stock price. This checklist is customized: Users can add their own criteria to the default checklist.
Additionally, GuruFocus implemented several checklists, including Paulson’s Merger Arbitrage Checklist. An earlier article discussed each of the criteria listed on the checklist, which is based on the risk-arbitrage specialist’s discussion on the “risk” in risk arbitrage. Other checklists pertain to various strategies like Ben Graham’s Net-Net strategy, Phil Fischer’s Growth Companies and two of Peter Lynch’s strategies: stalwarts and fast growers.
Disclosure: The author has no position in any of the stocks mentioned in the article.
Start a free seven-day trial of Premium Membership to GuruFocus.
