Air Products spun off Versum under pressure from Bill Ackman’s Pershing Square, and may be a success story for him among a string of failed investments. His short and public battle with Herbalife(HLF), ill-fated love affair with Valeant(was VRX, now Bausch Health BHC), and disastrous attempted transformation of JC Penney(JCP) stand out as particularly poor outcomes of the last few years. We don’t know Ackman’s exact return on Air Products, which seems to have been positive, but, in any case, was not an unmitigated disaster like those others.
Air Products shareholders received one share of Versum stock for every two shares of Air Products stock that they owned. The spinoff was tax free and the company released a useful letter at the time explaining the tax basis adjustments that the transaction caused. Air Products stock today sits 35% above its price at the time of the spinoff. Versum stock is now more than twice its post spinoff price of $22.70, largely due to the two competing bids to acquire it.
On January 28, 2019, Entergis(ENTG) and Versum entered into a merger agreement. Under the agreement, Versum shareholders would receive 1.120 shares of Entegris stock for every share of Versum stock owned. At Entegris’s March 4 closing price of $36.61, each Versum share would be valued at $41. This represented a significant premium for Versum shareholders, but, on February 27, German drugmaker Merck KGaA made an all-cash bid of $48 per share. Entegris responded to Merck’s bid, noting that their stock deal allowed shareholders continued upside.
“The all-stock merger of equals of Entegris and Versum Materials will create a premier specialty materials company for the semiconductor and other high-tech industries and will be able to deliver meaningful value to Versum Materials and Entegris stockholders,” said Bertrand Loy, President and CEO of Entegris. “We believe this combination is highly complementary and strategically compelling, providing stockholders of both companies with the opportunity to participate in the significant upside potential of the combined entity.”
Versum responded by adopting a “Rights Plan”, a poison pill which would prevent a hostile takeover. Versum rejected Merck’s offer as “not superior”. Barron’s has long been a fan of Entegris and cheered this merger a week before Merck’s bid, noting
Barron’s could see shares of the new entity approaching $50 per share over the next few months after the deal closes and numbers are reset. Down the road, with margin expansion from the deal, we think Entegris shares could double.
We are comfortable with that call because Entegris has integrated a large deal and expanded margins successfully in the past. It bought ATMI is 2014. That was another transaction that broadened the company’s offerings and added more consumable products to the portfolio. Back then management guided for only $30 million in cost synergies, but Entegris margins actually expanded by about six percentage points in the three years after closing the ATMI deal.
Shareholders benefited. Entegris shares returned 27% a year on average since the ATMI acquisition closed. That’s nearly 13 percentage points better than the tech-heavy Nasdaq Composite Index over that time.
Barron’s followed up after the Merck bid, explaining why the Entegris offer might be superior
The next question to ask may be, why did Versum reject more money? That answer is more nuanced. The Merck offer was cash and the Entegris deal is a stock swap. So investors can still own Versum in the future if the Entegris deal goes through.
That’s not the entire story when comparing offers, though. Entegris and Versum is a merger of equals—the ownership split of the newly created company is nearly 50-50. That means Versum isn’t truly being sold. Versum doesn’t view an unsolicited offer for half of Entegris-Versum as all that attractive—or attractive enough to leave Entegris at the altar.
Merck has now appealed directly to Versum shareholders, urging them to pressure their board to consider its offer.
“We urge you to let the Versum Board know that Versum shareholders will not support the Entegris acquisition in light of our Proposal, which is unquestionably superior,” Merck said in a statement addressed at Versum investors.
“Our offer to engage directly with Versum to understand the rationale for the Versum Board’s determination has not been accepted,” it added.
Law360 reports that some investors have filed suit, hoping to block the Entegris merger.
We suspect that the back and forth will continue, and the market seems to believe a higher offer is in the cards, with Versum stock trading above Merck’s $48 bid.
Disclosure: Author holds shares of JCP, and no other stock mentioned