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🤑 An Opportunity for a +17% IRR

Amazon's acquisition of iRobot is becoming incredibly attractive..

07 Oct

Huge shoutout to Chris DeMuth Jr. for joining Daniel and I last week on Stock Market LIVE! on Seeking Alpha — he’s who inspired me to write this post. If you’d like to read more of his amazing work, click here.

What is Merger Arbitrage?

As you may remember from this post, companies grow their business in one of two ways — organically or inorganically.

Either “business is booming and our sales team is doing a great job,” or “let’s go out and buy an existing business, then merge it with our business — and together we’ll be an even bigger business.”

A wonderful example of a synergistic acquisition is what Rocket Companies (Rocket Mortgage, for those of you who might be unfamiliar) did with Truebill in 2021. They acquired Truebill for $1.2B in cash, then rebranded the company to Rocket Money. Rocket Companies saw a need for an all-in-one money app. Instead of building it themselves — they went out a purchased an existing company and made it their own.

The simplified process goes a little something like this:

  1. Company A realizes they want to grow inorganically

  2. Company A realizes Company B would be a wonderful addition to their existing business

  3. Company A and Company B work together to determine a price they’re willing to pay / be sold for

  4. Company A and Company B sign a definitive merger agreement that discloses to their shareholders every detail about the transaction — including the price

  5. Company A successfully buys Company B — and now they’re a bigger business because of it

Another important callout from the post linked above is that sometimes the FTC (Federal Trade Commission) blocks acquisitions from happening if they believe it will position the acquiring company to become a monopoly.

For example — If for some reason AT&T tried to go out and buy Verizon, T-Mobile, Visible Wireless, Cricket, and every other wireless provider under the sun — thus creating a monopoly — the FTC would quickly see what’s going on and block the transactions from happening.

They’ve done this with Meta (Facebook) a few times.

Despite both Company A and Company B having signed a definitive merger agreement, the transaction can still be blocked by the FTC if there’s a reason to believe a monopoly is forming (among other reasons).

Not until after the FTC approves the transaction can Company A finalize their acquisition of Company B — and that uncertainty can be reflected in the stock price of Company B, presenting an opportunity.

Amazon to Acquire iRobot (IRBT) for $61 / share

Announced just two months ago, Amazon and iRobot have entered into a definitive merger agreement under which Amazon will acquire iRobot for $1.7 billion — equating to $61 / share.

“We know that saving time matters, and chores take precious time that can be better spent doing something that customers love.

Over many years, the iRobot team has proven its ability to reinvent how people clean with products that are incredibly practical and inventive — from cleaning when and where customers want while avoiding common obstacles in the home, to automatically emptying the collection bin.

Customers love iRobot products — and I’m excited to work with the iRobot team to invent in ways that make customers’ lives easier and more enjoyable.”

— Dave Limp, SVP of Amazon Devices.

Yeah, Amazon is trying to purchase that company that makes those little Roomba vacuum cleaners that roll around your house and suck up the dust and spills.

And this makes a lot of sense! In the post below, we shared a detailed update from Amazon’s Product Event that took place just last week — TL;DR Amazon wants to own every aspect of your daily home life.

From smart speakers and alarm clocks to security systems and internet routers — Amazon is building and improving them.

Then why isn’t iRobot trading at $61 / share?

Introducing the concept of merger arbitrage — because there is the uncertainty of the deal being completed, the stock price of the target company (iRobot) typically trades at a price below the acquisition price.

The uncertainty stems specifically from the deal being approved by the FTC.

As I’m sure you’re well aware, there are a lot of people who don’t like Big Tech — especially Amazon. And on that long list of people is Senator Elizabeth Warren — who wrote to the FTC urging them to block the iRobot deal.

“Given Amazon’s record of infringing on consumers’ privacy, and their ongoing history of anticompetitive mergers to increase their monopoly power, the FTC should use its authority to oppose the Amazon – iRobot transaction.”

This has caused the stock price of iRobot to begin trading close to $56 / share — representing an +8% upside to iRobot shareholders if the acquisition is goes through at $61 / share. Assuming it’s approved within the next six months or so, iRobot shareholders could expect a +17% IRR.

So What’s the Play?

It’s simple. If you believe Amazon can convince the FTC (and other foreign regulators) to approve their acquisition, every share of iRobot you own will be redeemed for $61 in cash upon completion. According to Chris, an expert in merger arbitrage, the deal should close by Q2 of 2023.

Keep in mind, there is absolutely a chance of the deal being delayed as Amazon is a very large company with a lot of enemies willing to fight against any chance for inorganic growth.

The FTC’s Chairwoman, Lina Khan, actually published a Yale Law Journal article in 2017 titled “Amazon’s Antitrust Paradox” in which she argues that US policies and laws weren’t enough to keep giants like Amazon accountable.

Before the acquisition was announced, Amazon actually requested the recusal of Lina Khan from any antitrust investigation in which Amazon is a subject.

"Given her long track record of detailed pronouncements about Amazon, and her repeated proclamations that Amazon has violated the antitrust laws, a reasonable observer would conclude that she no longer can consider the company’s antitrust defenses with an open mind.” — WSJ

There’s also been chatter about this acquisition becoming a privacy issue for Amazon customers. For example, Amazon gave Ring doorbell footage to police without user content in Oregon just a few months ago. This wouldn’t exactly have anything to do with antitrust — but might be another reason to catalyze a delay in the approval process.

With that being said — iRobot shared this LinkedIn post reassuring to their customers privacy is always top of mind.

Personally, I’m going for it!

I think there’s a massive case to be made against this being a monopolistic move if you simply take the time to search “robot vacuum” on Amazon’s own website.

A few brands that immediately pop up:

  • Syvio

  • Light n’ Easy

  • Eufy by Anker

  • Shark

  • Thamtu

  • OKP

  • Roborock

  • Lefant

  • Crazypig

  • AirRobo

  • Bissel

I just find it incredibly hard to believe that Amazon acquiring iRobot is monopolistic when there are 35 other robo vacuum companies out there — some with even 11,000+ reviews. It just doesn’t make sense to me.

I’m obviously not betting the farm here, but I’ll be opening a sizable position in iRobot with the assumption every share I own will be redeemed for $61 in cash before Q2 of 2023.

Thank you so much for reading!

As always, we’re open to any and all feedback from our community. If you plan on joining Chris and I on this trade — let me know in the comments! And if you enjoy research on merger arbitrage, please let me know so we can begin prioritizing it.

Disclaimer: This is not financial advice or recommendation for any investment. The content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.

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