Merger Arbitrage Blog

Softbank Closes Fortress Investment Merger

Softbank officially closed its acquisition of Fortress Investment, marking the end of an era of the first listed private equity investment company. 

The entire process took 315 days or about slightly more than 10 months. Throughout the whole period, and from day one, investors are very confident that the merger will close, hence the spread did not increase alot. If one were to invest from the start, the returns will be quite meager.

However, we can sometimes anticipate when a merger will close to lower the amount of time we need to hold the equity. For Fortress Investment, we know that the management had always guided an end of Year 2017 guidance which is surprising accurate! From the share price action, we know that many investors (including me) did not believe the management's guidance or chose to ignore them. 

Back in Jun-Jul 2017, the price is near $8..just about 1% from deal price and that signals about a 3 month max time frame for deal closure. I was invested in early Jun in anticipation of FTC, MOFCOM and CFIUS approvals to come but by early July when even FTC approval was not forecoming, I cut my position as I was unwilling to wait in the event of deal delay.

In my own research for similar deals, i found that Henderson / Janus merger could be used as a guide to how long Fortress Investment merger was going to take. The Henderson / Janus merger was of a similar size at around $6 billion and took a total of 8 months. Competition and anti-trust wise, there should be little issues but perhaps the complexity of private equity funds with their many varied investments was a factor in lengthening the time for review. I figured Fortress Investment would take a shorter time as it was smaller in size and scope even though there is still a need for CFIUS approval but i was wrong. The ultimate stumbling block proved to be CFIUS. Several investors speculated that CFIUS may have some issues with Fortress Investment's patent trove and financial dealings as well as Softbank's use of China based IT vendors (e.g. Huawei) for its systems. 

As the merger dragged on towards October with no resolution and little in news from either party, the share price begin to suffer as it drops towards $7.80. In the beginning of December after Brocade's closure, I am flushed with funds but no new targets to invest in. I begin to take small positions of Fortress Investment throughout December while anticipating CFIUS to ultimately approve the transaction by end of Jan 2018. Finally in 27th December, Softbank announced the closure of the merger and I was caught with only completing the purchase of half my intended positions in $FIG. Nevertheless, it was a happy ending and a nice little Christmas present.

I feel that the mergers of private Investment funds need to be analysed differently from tech and biotech companies with the expectation of merger closure time to be adjusted accordingly, even though the risk profile is similar to tech and biotech. 

Updated: December 29, 2017 — 2:33 am

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