Updated: Jan 28, 2019
Authors: Chris Jin Co-VP Education/Research, Jason Sohal Co-VP Education/Research, Gohulan Sivakumar M&A and Deal Flow Analyst, Bill Shu Commodities Analyst
Mergers, Acquisitions and Deal Flow
Manufacturing & Technology
On Friday, November 9th, II-VI Inc., the optical products maker, revealed it would acquire Finisar Corp., which happens to be a massive Apple supplier, for approximately $3.2 billion. II-VI Inc. will be paying Finisar shareholders $26/share in a cash and stock deal at a premium of approximately 38% to Finisar’s closing price on Thursday (FNSR.O - $18.88). As Finisar is a global technology leader in optical communications, this appears to be a synergetic fit for II-VI Inc. as it will allow them to secure a bigger portion of 5G Investments and be able to sell more sensors for driverless cars and iPhones. Following this announcement, Finisar’s shares have risen by 18.5% [CF1] whereas the shares of II-VI Inc. have dipped 16.5% to $39.16; classic price behaviour of acquisition announcements. You may be wondering why the share price of FNSR.O rose 18.5% given a 38% premium, well, this could explained by the two following scenarios: 1) the market is pessimistic about this transaction 2) the time value of money since the deal won’t close until a later date. As Finisar continues developing their cutting-edge technology by making lasers that power iPhone Face ID, this can give II-VI Inc. the advantage to persuade new customers as the aggregate demand for 3D sensing technology has been rising immensely amongst smartphone manufacturers.
Investment Management & Technology
On Wednesday, November 7th, the high-speed trading firm, Virtu Financial Inc., acquired independent brokerage Investment Technology Group Inc. (ITG) for a deal worth $1 billion. This is a bold move for Virtu Financial Inc. because by adding big time institutional investors it will allow them to bolster their agency services offerings (comprising of analytics, transparent trading and workflow technology, and liquidity solutions) to its institutional client franchise. Following this deal, ITG shareholders received $30.30 in a cash deal per share representing a 9 per cent premium to Tuesday’s closing price. This deal is a tactical move by Virtu Financial Inc. because they are adding to their market capitalization following the acquisition last year of one of their rivals, KCG Holdings Inc., another high-frequency firm. As the competition in the proprietary trading sector intensifies, it will be interesting to see how Virtu Financial will be able to deliver these big institutional investors given their ability to execute orders for retail brokerages.
U.S. telecom infrastructure company, CommScope Holding stated on Thursday November 8th, it is nearing a huge acquisition of a set-top box maker, Arris International Plc, for $7.4 billion inclusive of debt. This is a sound business move by CommScope as this deal will provide CommScope more scale coupled with a further diversified product base ahead of the global roll-out of 5G. With CommScope shares losing almost half their value since last April, this deal could have not been struck up at a more ideal time. As this transaction is expected to double the size of CommScope whose market capitalization is $4.8 billion, CommScope’s future looks bright. Prior to the deal, both companies’ products have been viewed as more commoditized and easily substituted, however following the deal it has allowed CommScope to bulk up its their infrastructure and get ready to roll out 5G networks. Arris shares have jumped more than 10% since their closing price on Thursday. In the long run, it will be intriguing to see how CommScope’s share price trends and how their boost in market capitalization will enhance their market dominance.
On Thursday November 8th, the U.S. WTI benchmark descended into a bear market (which is usually defined as a drop of at least 20% from a recent peak), ending its longest bull market since early 2015. WTI December Futures prices dropped 4.7% for the past week, marking its 5th consecutive weekly drop.
The main reason for the decline is simply over-production and excess supply. A few months ago, fears of a supply crunch mainly due to Iranian sanctions caused major oil producers such as Saudi Arabia, Russia, and the U.S. to drastically increase oil production more than ever, which has engendered the current predicament of over-production. According to Christian Malek, head of EMEA oil and gas research at J.P. Morgan, "the market's not tight. I think there are windows where you could perceive it to be tight, and I think the markets got caught into that. The reality is that we're still in a world where we're over-producing and we've got surplus.” In addition, the Trump administration also decided to temporarily waive the threat of punishment for some countries that buys oil from Iran, which contributed even more to oil over-production.
In addition, the growth fears that have been correcting the stock market have also decreased the demand (or the expectation of demand) for oil, which lowers its price as well. The growth fears have originated from trade war concerns as well as increasing interest rates, which are unlikely to be resolved for the near future. "It's so amazing how fast sentiment shift. The economic slowdown fears are winning the narrative," said Michael Tran, director of global energy strategy at RBC Capital Markets. Market sentiment has continued to be relatively pessimistic for the time being. According to Tony Headrick, an analyst at CHS Hedging, “we’re in a free fall. The market’s diligently searching for a price point that could provide a base for a potential rebound. I don’t think we’ve found it yet.”
Meanwhile, on the contrary of oil, natural gas futures rallies to highest in 2 years following the oil bear market, mainly due to concerns of tight supply and an expectation of cold weather. In recent years, the U.S. usually starts the year with record-high natural gas storages, yet this year natural gas in U.S. storage facilities just arrived at 3.208 trillion cubic feet in the week ended Nov. 2, which is 16% below the five-year average. "I think we're looking at the potential for shortages towards the end of the season, depending on how the winter goes," said John Kilduff, partner with Again Capital.
Gold price has also been slightly declining in November, giving up its October gains as it trades near its 4-week low. December gold futures last traded at $1,208.60 an ounce, down 2% from the previous week. The main reason for the drop is the bearish oil market. According to Ole Hansen, head of commodity strategy at Saxo Bank, the struggle of the gold price is due to the drop in oil (arguably the leading asset among commodities), which has created extreme pessimism throughout the commodity complex. In addition, the Federal Reserve’s monetary policy statement on November 8th, which reiterates its decision to continue rate hikes and normalize interest rates, has also adversely affected gold prices since rising rates would make the U.S. Dollar more attractive, which in turn lowers the demand for gold.
The above information does not constitute the provision of investment, legal or tax advice. Any views expressed reflect the current views of the authors, which do not necessarily correspond to the opinions of University of Waterloo Finance Association (“UWFA”). Opinions expressed may change without notice. Opinions expressed may differ from views set out in other documents, including research, published by UWFA. The above information is provided for informational purposes only and without any obligation, whether contractual or otherwise. No warranty or representation is made as to the correctness, completeness and accuracy of the information given or the assessments made.