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James Li
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A Deeper Understanding of John Paulson's Merger Arbitrage Checklist

Mergers can fail primarily due to antitrust and national security concerns

Several recent mergers, including the merger between Qualcomm Inc. (NASDAQ:QCOM) and NXP Semiconductors Inc. (NASDAQ:NXPI), have failed primarily due to high regulatory risk.

Brief summary of the merger arbitrage checklist

John Paulson (Trades, Portfolio)’s Merger Arbitrage Checklist identifies seven criteria for successful mergers: definitive agreements, strategic rationale, no financing condition, no due diligence condition, solidly performing target, reasonable valuation and limited regulatory risk.

Figure 1 shows a sample checklist for the failed merger between Qualcomm and NXP.

Figure 1

Although the merger receives a grade of 5 for the first three criteria, the Qualcomm-NXP merger receives a grade of 1 for “limited regulatory risk,” the worst possible grade. The two companies mentioned in their Nov. 18, 2016 Schedule TO filing with the Securities and Exchange Commission that the merger required regulatory approval from the Federal Trade Commission and several other antitrust jurisdictions in Europe and Asia. Additionally, the merger required the tender of at least 80% of NXP’s shares outstanding.

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According to MarketWatch.com, Qualcomm extended its NXP tender offer at least 28 times since the Oct. 26, 2017 merger announcement date. The San Diego-based company terminated the agreement on Thursday following China’s failure to approve the deal.

Other mergers raise antitrust concerns

Although U.S. District Court Judge Richard Leon approved the merger between AT&T Inc. (NYSE:T) and Time Warner Inc. (NYSE:TWX) in June, the Department of Justice appealed the approval on July 12 on several antitrust issues, including a “less-competitive and less-innovative” pay-TV market. The Federal Communications Commission, which oversees communication deals, according to Paulson, established a “pleading cycle” regarding the merger between T-Mobile U.S. Inc. (NASDAQ:TMUS) and Sprint Corp. (NYSE:S) on July 18, according to its website.

High regulatory risk is not limited to antitrust issues

Paulson mentions in his paper, “The ‘Risk’ in Risk Arbitrage,” that while antitrust represents one “common form of government scrutiny,” other issues, including national security, can threaten mergers. President Trump blocked a combination between Qualcomm and Singapore-based Broadcom Inc. (NASDAQ:AVGO) in a March 12 executive order, saying that Broadcom’s takeover of Qualcomm would “threaten to impair the national security of the U.S.”

See also

GuruFocus’ Checklist feature allows you to grade a company based on a set of criteria. The website offers several checklists, including the Peter Lynch Growth checklist and the Ben Graham Net-Net checklist. You can also create your own checklist, as demonstrated in the following YouTube tutorial.

Premium members can view charts underneath the “Research Parameters” section to assist them in selecting the grade for each checklist item.

About the author:

James Li
I am an editorial researcher at GuruFocus. I have a Master's in Finance from SMU, and I enjoy writing reports on financial trends and investor portfolios. Follow me on Twitter at @JamesLiGuru!

Visit James Li's Website


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