Microsoft Stock: Picking up nuances in front of a steamroller (NASDAQ: MSFT)
Lately, safe and consistent mergers and acquisitions have become unpredictable and scary. Here are some recent headlines:
Lockheed Martin (LMT) ends $4.4 billion deal to acquire Aerojet Rocketdyne (AJRD)
Changing Healthcare (CHNG) falls on the DOJ report preparing a costume to block United Healthcare deal
Nvidia-Arm (NVDA) the case collapses
Athlete Warehouse (SPWH) plunges after sale ends at Great Outdoors
Zynga (ZNGA) may see extensive antitrust review of planned sale to Take-Two (TTWO)
While some trades are breaking and others are faltering, there are still stable ones offering good returns. One of them is Nuance Communications (NUAN). Microsoft (NASDAQ: MSFT) is buying Nuance for nearly $20 billion, which equates to $56 per share in cash. The merger was announced last April. Microsoft wants Nuance for its AI and cloud-based transcription intelligence for healthcare providers. Nuance serves more than 3/4 of US hospitals.
“AI is technology’s most important priority, and healthcare is its most pressing application,” said Satya Nadella, CEO of Microsoft.
In June, the HRT waiting period expired. And in December, the EU signed the rapprochement.
So what’s left? The UK Competition and Markets Authority is investigating whether the combo would hinder competition in the UK. The deadline for the AMC to announce its decision on whether or not to refer the merger to a Phase 2 investigation is March 9. As the UK becomes more active on the regulatory front, it seems very unlikely to me that it will try to block the merger. Even the extension to a phase 2 would surprise me.
What does Nuance say?
We expect the merger to be completed by the end of the first calendar quarter of 2022.
At the time of this writing, Nuance is trading at $55.27 per share, 73 cents below the offer price. While the 1.3% return doesn’t seem like much at first glance, assuming the close is at the end of March, the annualized return would be a solid 10.7%. And by selling the money calls against the market position, the IRR could reach 15.2% depending on how far one is willing to exit on the options chain. The stock traded in the mid-$46s before the deal was announced and since then tech stocks have risen around 7%, suggesting that even if this merger was not complete, the Nuance stock would have a somewhat limited decline.
Hedge Funds/Arbitrage Funds
I monitor 30 hedge funds specializing in M&A each quarter, and for two consecutive quarters Nuance was the top stock, appearing in 24 of 30 funds (each fund had at least 1% of its portfolios in Nuance).
It’s been over 10 months since Microsoft and Nuance agreed to merge. The strictest regulatory approvals, both in the US and in the EU, have been obtained. All that’s left is the UK and while anything is possible, it seems a long way for them to stand in the way. There is a double digit annualized gain available at the moment and selling calls out of the money against the position would yield even greater returns.