Over the week-end Barrick Gold and Newmont Mining announced that they had been in advanced merger discussions, but that they had failed to come to an agreement. Their self imposed deadline that corresponded with their Annual General Meetings expired. Given that they were unable to come to a consensus about the terms of the merger, they halted the discussions.
After announcement, the market quickly adjusted to the new information – with Barrick falling almost 4% and Newmont gaining more than 6%.
Have a look at the divergence in the trading of the two stocks over the past couple of days:
ABX and NEM trading over the past couple of days</a> </div></p>
The deal was not taken well by ABX shareholders. They pushed Barrick to fresh 3 month lows:
ABX daily chart</a> </div>
I am not going to bother analyzing the intricacies of the deal – there is plenty of research out there about the relative merits of the merger. I would rather focus on yesterday’s reaction.
I was a little surprised at how much ABX went down and NEM went up. This deal is not even a deal yet, but the market moved the spread between the two companies 10% in one day.
I understand that ABX has a history of royally screwing things up with big flashy takeovers. Therefore a certain amount of “oh no! not again!” is indeed called for. But I think that yesterday’s reaction was unduly harsh.
Given the moves in both stocks, even if the deal is consummated, the spread between the two companies will be almost fully priced in.
With yesterday’s drubbing, I think that ABX is a low risk long.
If they do the deal, I think the market has already taken ABX down to levels where any merger relating selling will have minimal effect on the share price. If they don’t do the deal, then ABX will hopefully recover the ground it lost on Monday.
I also think that the market is being unduly pessimistic about this deal. Many analysts’ research pieces had a negative tone regarding the cost savings and the logic behind the deal. My guess is that they have seen too many mergers fail to live up to the hype.
But I think they are missing the fact that most big mergers are done at the top of the cycle. Therefore it is almost always inevitable that these mergers disappoint. By their very nature the acquiring company is over paying for the asset.
This merger is not the result of an over enthusiastic CEO that has been riding a wave of ever increasing stock price and in a macho state of hubris over bids for an asset. No, this is the merger of two companies that have made too many mistakes and now find themselves desperate to cut costs and get more efficient.
ABX and NEM stock price over the past 4 years</a> </div></p>
The initial reaction from the market in terms of ABX’s price was quite negative, but my guess is that as the management gets around to institutional shareholders and tells the story, that the market will see the logic in the deal.
If the deal goes through, it will eventually be a positive for the ABX share price.
The market made a mistake with yesterday’s sharp ABX sell off – therefore I initiated a long position. I already like the gold stocks, so adding some Barrick into that dip seems like a good trade. I think a case could be made that ABX will most likely rise with either outcome – deal or no deal.
Not only did I buy some ABX, but I decided that selling some puts would also help if the price gets stuck with a merger overhang in the event the deal is announced. I sold some at the money (ATM) and slightly out of the money puts in May and July.
It is not very often that I feel confident enough to say that the market is wrong on the reaction to a potential merger announcement, but this is one case where I am willing to take the other side of the knee jerk move lower.