| Here's how a merger works. Some public company is trading at $20 per share. Another company wants to buy it. The buyer goes to the target company's board of directors and offers to pay, say, $28 per share in cash for all of the target's shares. The target's board thinks about it and decides that this is pretty good: $28 is a good result for shareholders, and a 40% premium to the price today. So the board says yes, and the buyer and the target sign a merger agreement. Then the target's shareholders get to vote on the deal. This is ordinarily just a majority vote [1] : If 51% of the shares vote in favor of the deal and 49% vote against, the deal passes. And a merger is binding on all of the shareholders. If you think that the company is actually worth $40 per share and you don't want to sell at $28, you can vote against the deal, but if a majority of the shares vote in favor then the merger will close and everyone's shares — including yours — will automatically be sold to the buyer for $28. You might dislike this. You might dislike it for the simple reason that you think the company is worth more than $28, but you might also have concerns about fairness. There might be conflicts of interest in the deal: The buyer might have teamed up with the chief executive officer or a controlling shareholder of the company to make its bid, or the buyer might be the CEO or controlling shareholder, and you might worry that the board gave the buyer a sweetheart deal rather than trying to maximize value for shareholders. And so Delaware law [2] gives you a safety valve. If you don't like the deal price, you can demand "appraisal": You can go to court and say "they sold my shares for $28, but really they're worth $40, and that's unfair." And if a judge agrees with you, she can make the buyer pay you $40 instead of $28. (Only the shareholders who demanded appraisal get the $40, though; everyone else is stuck with the $28. [3] She will also make the buyer pay you interest on the extra money, at an oddly high statutory rate, which makes this an even better deal for you.) But you put yourself entirely in the hands of the judge: If she agrees with you that the company is worth $40, you get $40; if she agrees with the buyer that it's worth $28, you get $28; if she thinks "actually this company is only worth $15 per share," then you get only $15 and wish that you had taken the $28. A very stylized history of appraisal is that, for a while, "appraisal arbitrage" was a big business: Hedge funds would buy shares of companies that they thought were selling themselves too cheaply, they would demand appraisal, they would make arguments about (1) the unfairness of the deal process and (2) the high intrinsic value of the target company, courts would often award them more money than the deal price (with interest), and they would make a nice living. But then, around 2017, appraisal arbitrage stopped being so attractive. [4] Courts in Delaware decided that things had gotten out of hand, so: - They started deferring more to deal prices: The assumption is that if a company runs any sort of reasonably competent deal process to sell itself, and the highest bid it gets is for $28, then the company can't be worth $40. If the company was worth $40, someone would have paid $40.
- They started deferring more to the unaffected price of the company. If the company was trading at $20 per share, and it agreed to a merger at $28 per share, that suggests that the company probably isn't worth more than $28, but it doesn't prove that it's worth $28, either. The buyer might be overpaying. Or it might be paying for synergies — benefits from combining the target's business with the buyer's — which are not part of the value of the target and so can't be awarded in appraisal. The buyer can now argue in court "actually this company is worth $20, as you can tell because that was its stock price, and we paid $28 because of generosity and overconfidence and synergies." And the court will give the shareholders $20, not $28.
Notice that these are both essentially efficient-markets arguments: Courts started saying "look, the stock market is good evidence of actual value, and a public merger process is good evidence of actual value, and both of them are better than our guess at value, so we're going to rely more on markets to figure out the value." In the golden age of appraisal arbitrage, you could sue for appraisal and (1) probably get paid more than the merger price and (2) almost certainly not get paid less. In the new, post-2017 age, if you sue for appraisal you (1) probably don't get paid more than the deal price and (2) have a real risk of getting paid less. In recent cases, shareholders have more often gotten less than the deal price than more. [5] So appraisal became considerably less attractive as a strategy. If you look at the deal price for a company and build your own discounted cash flow model and conclude that, on reasonable assumptions, the company is actually worth $40, you won't bother: A court is just not that likely to defer to your discounted cash flow model, but will instead consider more objective facts like "the stock was trading at $20 before the deal was announced" and "the best deal the board could get was for $28." Your spreadsheet with "$40" at the bottom can't compete. But appraisal still exists, and there are still cases, and sometimes they pay out. Sometimes the deal process is so conflicted, and the shareholder's discounted cash flow model is so compelling, that the court decides the deal price is wrong and gives the shareholder $40. And there are circumstances where the shareholder might have more than a discounted cash flow model to offer. What if the company has $1 billion worth of Bitcoin, and is selling itself for $500 million? [6] You can go to court and say "no there's literally $1 billion of stuff there, it can't possibly be worth only $500 million." And the court might agree with you, on efficient-markets grounds. One technical point here. Generally the way mergers work is that the deal price — $28 per share in my examples — is set when the merger agreement is signed, when the target's board agrees on the deal with the buyer. But normally the merger doesn't close for months after that: The target's shareholders get to vote, the buyer might have to line up financing, you need to get antitrust approvals, etc., before the buyer actually pays for the shares and gets the company. Appraisal value, though, is measured a closing. It can change. What if the company has $10 per share worth of Bitcoin at signing, but by closing those Bitcoins are worth $30 per share? Well then, if the deal price is $28, you've got a good appraisal case. In theory you could imagine manipulating that. If the target owns a lot of Bitcoin, and you own a lot of target shares, you could go out and buy Bitcoin to push up its price before closing, which would also push up the value of the target shares and make you more likely to win your appraisal case. In practice this seems hard: Bitcoin is quite big and liquid, and you'd surely spend more to manipulate Bitcoin than you would make on the appraisal. To make this work, you'd need the target company to own a lot of an asset that (1) has a public market price that you can point to in court as objective evidence of value but (2) is not particularly liquid, so you can manipulate it. Endeavor Group Holdings Inc. is a public company that grew out of Ari Emanuel's talent agency. [7] It did a series of deals — adding William Morris Agency, IMG Worldwide and Ultimate Fighting Championship (UFC) over the years — with investment from Silver Lake, the private equity firm, which owned 68% of Endeavor by the time it went public in 2021. (It currently owns 74.4% of the total voting power.) In 2023, UFC agreed to a merger with World Wrestling Entertainment, which resulted in the combined UFC/WWE company becoming part of a new separate publicly traded business, TKO Group Holdings Inc. Endeavor owns about 53.9% of TKO. Later in 2023, Endeavor announced that it was exploring strategic alternatives, and Silver Lake expressed an interest in taking Endeavor private, buying the shares that it did not already own. Endeavor formed a special committee of independent directors to negotiate a deal with Silver Lake. In April 2024, they agreed on a deal in which Silver Lake would buy out the minority shareholders of Endeavor for $27.50 per share, about a $13 billion equity value, "representing a 55% premium to the unaffected share price of $17.72 per share at market close on October 25, 2023, the last full trading day prior to Endeavor's announcement of its review of strategic alternatives." There were various conditions to the deal, and it is scheduled to close in two weeks, on March 24, 2025. The shareholder vote was a formality: Silver Lake controls 74.4% of the voting power of Endeavor's stock, so it just consented to the deal and that took care of the shareholder vote. Some going-private mergers are conditioned on a vote of the minority shareholders, but this one wasn't: Silver Lake had full power to approve the deal and cash out the minority shareholders. They got an information statement explaining the deal, but they weren't asked to vote. You could imagine how the minority shareholders might be annoyed: No one asked them for their opinion, but now they're being cashed out of the stock at a price agreed between the board and the controlling shareholder. It's the sort of situation that appraisal rights were made for. [8] On the other hand, $27.50 is a 55% premium to the pre-deal-discussions trading price of the stock, so maybe it's fine. You can get a sense of how much Endeavor thought it was worth when its board approved the deal. Because it is a going-private transaction, Endeavor had to file all of the valuation materials it got from its financial adviser, Centerview Partners. Here is the final fairness deck that Centerview delivered to the special committee on April 2, the day it approved the merger. [9] The "football field" chart on page 4 — where the bankers lay out various valuation methodologies and compare their results to Silver Lake's bid — is not the most exciting one I have ever seen; two of the four valuation methodologies — based on analyst price targets and discounted cash flow analysis — produce ranges of valuations ($28 to $36 and $27.58 to $36.23) that are all above Silver Lake's $27.50 bid. [10] But the deal price was above Endeavor's 52-week trading range ($17.67 to $25.88 per share), and it was within the range of values that Centerview got from its comparable public companies analysis ($22.44 to $30.89). All in all, Centerview gave an opinion that the deal was fair to the minority shareholders, and the board approved it. Roughly speaking, Centerview's various analyses attribute about $3.8 billion to $5.2 billion of value to Endeavor's own business, and about $5.2 billion to $9.4 billion of value to its then-51% stake in TKO. [11] Centerview valued TKO from scratch, as it were, doing its own work to figure out how much TKO was worth, and then attributing 51% of that value to Endeavor. But you could check that work: TKO is a public company, and it has a market value. At the time, TKO was trading at about $86.18 per share, for a total market capitalization of $14.8 billion. [12] Half of that is $7.4 billion, so Centerview's valuation — $5.2 billion to $9.4 billion — was in line with the market's. That was a year ago. This past Friday, TKO closed at $143.73 per share, for a total market capitalization of $28.4 billion. Half of that is $14.2 billion, or a bit more than Silver Lake is paying for all of Endeavor. By taking Endeavor private, Silver Lake will get its equity stake in TKO at a discount to TKO's current market price, and will get the rest of Endeavor — worth say $4 billion or so — for free. [13] Ehh that's awkward. Bloomberg's Yiqin Shen reported last week: A faceoff is unfolding between Silver Lake Management and event-driven hedge funds over the private equity firm's bid for Endeavor Group Holdings Inc., the Beverly Hills talent agency backing the WWE and UFC — and the winner may be decided in court. On the one side is Silver Lake, which announced an agreement in April to buy out Endeavor's minority investors at $27.50 a share. It already has a 71% voting stake in the talent shop led by superagent Ari Emanuel, and its involvement with Endeavor stretches back more than a decade. On the other side are sophisticated traders at firms including Westchester Capital Management, who have piled into Endeavor stock in a bet they'll get an even higher deal payoff — pushing the share price past the buyout offer. Their rationale has to do with Endeavor's controlling interest in TKO Group Holdings, the parent of the popular wrestling and mixed martial-arts leagues, which has surged more than 70% since Silver Lake announced its bid. By traders' logic, the rally in TKO's shares means Endeavor is worth more, and so that justifies a sweetened offer. But on Monday, Silver Lake stated it would close the deal on current terms this month. It also criticized hedge funds that have speculated on the deal, accusing them of causing "an artificial increase in the stock price." … Silver Lake's move this week "strikes us as a scare tactic to try to shake out weak or unsophisticated holders," said Roy Behren, co-chief investment officer at Westchester Capital Management, which runs the $2.3 billion Merger Fund. "We are prepared to exercise our appraisal rights on behalf of our investors, and to pursue this as long as it takes, given how blatantly unfair the deal price is to minority shareholders." From Silver Lake's press release: It has been reported in the press that large blocks of shareholders have arbitraged the deal in order to demand appraisal. Silver Lake believes that the pervasive trading by these hedge funds, many of whom accumulated substantial positions in the stock of Endeavor (and presumably also its public subsidiary, TKO Group Holdings, Inc. (NYSE: TKO)) only after the deal was announced, has caused an artificial increase in the stock price. Appraisal entitles dissenters to the fair value of their Endeavor shares, not to amounts attributable to artificial inflation through arbitrage activity.
Here are, roughly, the two competing positions. - The appraisal arbitrageurs say: Look, okay, it's hard to win an appraisal case. Markets are efficient, and the market price of a stock is generally the best evidence of its value. If we tell you that Endeavor is worth more than $13 billion, you might not believe us. But the market price of just Endeavor's TKO stock is more than $13 billion: TKO trades publicly, it has a market price, and that market price tells you that Silver Lake is underpaying. So we want more money.
- Silver Lake says: No, that TKO price is fake; the arbs have bid up the stock to try to get more money out of us, and we're not paying.
I don't know. TKO's stock trades more than $100 million per day; it's not that easy to manipulate. (Amusingly it is joining the S&P 500 index on March 24, the closing date for the merger, which might further push up the price.) Also Endeavor was buying TKO stock last month, at prices even higher than today's price, which argues against it being an "artificial increase." Appraisal can take a long time, and Silver Lake seems to be willing to wait out the arbitrageurs, saying that it "hereby advises all dissenters that it does not intend to pay them any merger consideration at closing — nor at any time until there is full resolution with respect to such appraisal claims — consistent with its rights under Delaware law." (Buyers often pay dissenting shareholders the merger price at closing, to save on interest expense over the appraisal proceeding; Silver Lake won't do that, to make it more difficult to finance an appraisal position.) But you see why shareholders want appraisal. Usually, appraisal arbitrageurs argue that the market is wrong and the company's intrinsic value is not reflected in its market price, and in modern cases judges are reluctant to accept those arguments. But here the appraisal arbitrageurs want to get the market value, and the buyer is the one saying "no, the market price is wrong."  | | | Elsewhere in mergers and acquisitions. Often the way a hostile takeover works is that a bidder offers to buy a company for cash, and the company says "no, that price is outrageously unfair to our shareholders," and maybe even gets an opinion from its investment bank saying that the bid is inadequate. Generally the target company wants, or at least implies that it wants, much more money. But the bidder does not want to pay much more money. Eventually a deal is reached, where the bidder offers a little more money and the target says "ugh okay fine." And then it gets an opinion from its investment bank saying that the deal is fair, [14] and puts out a statement saying "we are pleased to have achieved full value for our shareholders." And if the original offer and the final price are very close to each other, it's all a little awkward, but everyone gets through it. You don't always get everything you want in a negotiation. QXO Inc. has been trying to buy Beacon Roofing Supply Inc. for a while, but Beacon has rebuffed its advances, and in January QXO launched a tender offer to buy Beacon for $124.25 per share. Beacon's board and management have consistently told shareholders to reject the offer. Last week Beacon put out a press release calling QXO's offer "an opportunistic attempt to take advantage of the current macro environment and acquire Beacon at a discount to its intrinsic value for the benefit of QXO but the detriment of Beacon's shareholders" and saying that "the vast majority of Beacon shareholders are underwhelmed by QXO's first and only offer" and that "the Offer significantly undervalues the Company and its prospects for growth and value creation." Standard stuff. Here's a joint press release that QXO and Beacon put out today: QXO, Inc. (NYSE: QXO) and Beacon Roofing Supply, Inc. (Nasdaq: BECN) confirmed today that they are in discussions about a potential combination in which QXO would acquire Beacon for $124.35 per share in cash, or total consideration of approximately $11 billion.
They got an extra 10 cents a share! It's something. Last year, Super Micro Computer Inc. had a rough patch. Hindenburg Research put out a report alleging that Super Micro was doing assorted accounting and sanctions badness, its auditor resigned, and there were reports of government inquiries into its accounting. This hasn't really gone anywhere yet — the company hired a new auditor and said it found no evidence of fraud — but the stock did drop a lot. And my core thesis around here is that "everything is securities fraud": If you are a public company and your auditor quits and your stock drops, you will be sued for securities fraud, whether or not anyone finds any proof of any accounting problems. So Super Micro was duly sued for fraud by shareholders who lost money when the stock dropped. The way these cases work is that the biggest shareholder who wants in on the lawsuit often gets to lead the lawsuit; often that's a public pension fund. Here it's … a walnut company? This is weird: According to court filings, [Crain Walnut Shelling] quickly amassed a $144 million stake in Super Micro stock and claims to have lost $49 million after a report written by an investment research firm accused the tech company last year of accounting manipulation, misleading investors and exporting banned components to Russia — allegations that sent stock prices tumbling. … [Judge Edward] Davila considered Thursday whether the walnut company should serve as the lead plaintiff in a putative federal securities class action lawsuit filed against the tech manufacturer in the wake of the investment firm's report. ... "Whether or not pouring this much money this quickly into a single stock is unusual for large institutional investors, it raises eyebrows when a walnut company does so," Davila wrote in court documents. … The nut company's founder Charles R. Crain, Jr. told the court that he uses Crain Walnut to make investments and generate returns, a structure that Davila noted in his order "only further begs the question why Mr. Crain would choose an entity actively operating in the walnut market to also serve as his investment vehicle." While much of the documentation that Crain Walnut provided about its business was not made public, its attorneys said in court filings that its financials negated "any question about its solvency" and noted that its multi-million dollar investments in Super Micro were "not even its largest holding." The attorneys argued that these investments were not unusual, noting that the nut company has a "large, diversified stock portfolio" and "derives a substantial portion of its revenue from investments of surplus cash generated by walnut sales." I need to get into the walnut business? I guess if you start a walnut company, and you sell a lot of walnuts at high prices, so that you end up with … many hundreds of millions of dollars of excess cash, you will want to invest that cash in the stock market. At this point, you are probably pretty smart and self-confident and a good businessperson, so you might want to pick the stocks yourself. You might, as a matter of business formalities and general tidy-mindedness, take the cash out of the walnut company and put it into a separate investment vehicle — you know, pay yourself a big walnut dividend, put the cash into a new legal entity formed to make investments, etc. But if you own the walnut company anyway, you might not bother with that. [15] "Now this is my walnut and investing company," you might reasonably think. Who cares; it's your money, and your company. The judge is perplexed by it but I guess it's not that weird. Berkshire Hathaway Inc., as we have discussed recently, was a random textile company that moved on to better things (being Warren Buffett's stock investing vehicle). Maybe Crain Walnut Shelling is on the same path. Not that Warren Buffett would necessarily have bought Super Micro but you know what I mean. Imagine if this wasn't the case: Behind Neom's problems: a dance of mutual delusion in which [Saudi Crown Prince Mohammed bin Salman] pushed for fantastical plans—and executives shielded him from the full scope of challenges and costs, according to former employees and a more than 100-page internal audit of the project presented to members of Neom's board last spring and reviewed by The Wall Street Journal. The audit report, labeled "final draft," found that executives, at times aided by the project's longtime consultants, McKinsey & Co., plugged unrealistically rosy assumptions into Neom's business plan to justify rising cost estimates. The audit found "evidence of deliberate manipulation" of finances by "certain members of management." Neom is the wildly ambitious multitrillion-dollar Saudi Arabian project to built a gigantic new city in the middle of the desert, "defined by cutting-edge technology and psychedelic architecture." It always seemed fantastical to me, but I don't hang out with Mohammed bin Salman. If I worked for him, and he was like "I want the city to consist of two buildings that are each 106 miles long and 1,640 feet high," I'd be like "sounds cool boss." And if he was like "can you accomplish that by 2035" I'd be like "I'll get right on that boss." What is the alternative? "No"? You don't get in that room by saying no to Mohammed bin Salman. And while Neom always seemed like a wild vanity project to me, I suppose if you work on it you have to find a way for the math to work. Making the math work, in this case, means achieving an internal rate of return of about 9%, significantly higher than the standard wild vanity project rate of negative infinity. One of the best-known facts about finance is that you can achieve any IRR that you want, in a spreadsheet: At Trojena, the planned ski resort, a fall 2023 review found that costs had surged by over $10 billion, according to an internal presentation reviewed by the Journal. That caused the IRR to fall to 7%, below the project's target of around 9%. To cover the gap, estimates for the rate at an "inventive glamping" site were readjusted to $704 a night, up from $216, according to the presentation. A "boutique hiking hotel" room was pegged at $1,866 a night, up from $489. The changes helped to push the IRR up to 9.3%. The audit said Antoni Vives, who oversaw the broad vision at Neom and then ran Sindalah, justified rising costs with higher assumptions on revenue, rather than reassessing them as too expensive. He told colleagues and McKinsey consultants in an email before a key meeting that "we must not proactively mention cost at all." How much would you pay to stay in a boutique hiking hotel at some point in the indefinite future in an unbuilt city in the Saudi desert? It's not like $489 is the right number. No one was in these meetings because they wanted to build cost-effective profitable glamping sites. They made up the numbers he wanted to hear, he heard the numbers he wanted to hear, everyone played their expected role, what is even the problem. Stock Rout Picks Up Steam With Recession Warnings Blaring. Donald Trump Jr. Has Big Plans for Monetizing MAGA. Chinese investors privately take stakes in Elon Musk's companies.The Walgreens Billionaire Watching His Empire Come Apart. Lasers, Magnets and the $40 Billion Fight to Store the World's Data. KPMG to merge dozens of partnerships in overhaul of global structure. "More potential investors have recently expressed interest in investing in the AI star despite concerns over DeepSeek's lack of a clear plan to make money." Thousands of Cat-Eared Robots Are Waiting Tables in Japan's Restaurants. If you'd like to get Money Stuff in handy email form, right in your inbox, please subscribe at this link. Or you can subscribe to Money Stuff and other great Bloomberg newsletters here. Thanks! | 
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