JetBlue Airways Corp. (NASDAQ: JBLU) agreed to buy Spirit Airlines Inc. (NYSE: SAVE) in July 2022 for $3.8 billion in what was poised to create the fifth-largest airline in the US.
Fast forward to today, and Spirit Airlines is valued at under $1 billion and trying to stave off bankruptcy. According to a recent note from investment bank TD Cowen supporting these dire claims: "We believe Spirit is likely to look for another buyer ... but a more likely scenario is a Chapter 11 filing, followed by a liquidation."
Regulators can call off mergers for a host of reasons, but the core reason is to avoid an outcome likely to reduce competition and lead to higher prices. President Joe Biden mentioned this in a tweet referencing the outcome saying, "[The] ruling is a victory for consumers everywhere who want lower prices and more choices."
The ruling is most certainly not a victory for investors and traders specializing in merger arbitrage, a deceptively riskier form of "arbitrage" than the stand-alone definition of arbitrage. The goal of merger arbitrage is to bet on the spread between the agreed-upon purchase price and what the stock currently trades at. If there is complete certainty that a merger will close, the stock of the company being acquired should rise to that exact price, with only a slight discount to account for opportunity cost money until the close - money market funds are offering over 5%, after all.
A $3.8 billion deal for Spirit equated to a $33.50 per share price. Before a U.S. federal judge officially blocked the merger, Spirit was trading at about $15, already reflecting significant uncertainty in the deal closing. After the blocked merger was announced Spirit fell 47% in a day to under $8 per share.
Perhaps the uncertainty baked in had something to do with the Adobe Inc. (NASDAQ: ADBE) and Figma merger recently being called off. Adobe and Figma mutually called off their merger as the companies could not find a clear path forward to receive the necessary approvals from European regulators, an outcome Adobe CEO Shantanu Narayen voiced his displeasure by saying, "Adobe and Figma strongly disagree with the recent regulatory findings, but we believe it is in our respective best interests to move forward independently."
Blocked mergers aren't just bad news for the company once assumed to be acquired. It's also problematic for the banking sector. A 2022 report from Bain & Co. predicted that "M&A [mergers and acquisitions] could account for 50% of revenue growth in banking in the years ahead, an increase from the already high 35% rate."
Companies already on the fence about merging may decide it's not worth paying the high banker fees and possible break-up fees for deals that don't close, limiting future M&A activity and an important growth vector for banks.
Adobe's merger agreement had a $1 billion breakup fee now payable to Adobe. JetBlue's agreement had a $400 million breakup fee to Spirit shareholders and an additional $70 million to Spirit itself if regulators blocked the deal. In the latter's case, that makes about half of Spirit's market value entirely a result of the breakup fee it's due.
The recent string of blocked mergers has helped many of the acquirer's share prices, at least for now. JetBlue stock ended the day up 4% on news of the Spirit merger getting blocked.
Shares of Adobe fell 14% in morning trading on the day it announced its planned acquisition of Figma, a drop in market value more than the entire proposed purchase price. They have since doubled.