0. Preface
I have published some very lengthy DDs of late, so let me keep this one slightly more snappy! This question came to me when reading through u/DarraghGogarty's extremely tit-jacking, speculative thesis on why Ryan Cohen met with Carl Icahn:
https://www.reddit.com/r/Superstonk/comments/y7gqdh/carl_ichan_is_not_going_to_buy_gme_shares/
There were some questions asked in comments about what this might do for the short positions in both GameStop and the Towel Stock. Specifically, I think some Apes were wondering whether an M&A might result in forced closing of short positions, and I believe the short answer to this is: NO. For a longer and more concise answer, see below an explanation by u/Consistent-Reach-152, which is also my understanding of these mechanisms. (If this is incorrect, please let us know.)
However, depending on the nature of an M&A deal, I believe it could lead to conditions where short sellers are squeezed out of their positions. Let me explain further in this DD.
1. Types of M&A Deals
First let us look at the three kinds of M&As:
All-Cash Deal: This is when the acquiring company makes an offer to buy out the target company, by offering a premium above the current stock price. This adds value to the stock held by the shareholders of the target firm, as they would receive more cash for their holding than the share price made at the time of the acquisition offer. The deal would be secured through cash only, as the name implies.
All-Stock Deal: This is a less popular form of financing an acquisition, in which the acquiring firm offers their own stock in exchange for the shares of the target company. Typically the respective share prices and outstanding share volumes are used to calculate an attractive offer, such as 4 shares of the acuiring company for 1 share of the target company. Thus no cash is involved in the deal, as it is effectively completed through an "exchange" of shares of the two firms.
Combination Deal: This is, of course, one which contains some portion of the two types above. They could also include other asset types, such as debt of some form (e.g. corporate bonds).
The most notable difference between the two main methods is that an All-Cash Deal makes it explicity clear what price the acquired company's stock is set at. This thus precludes the possibility of instigating a short squeeze, as natural price discovery is impossible with the target price already being set. An example of such a deal took place earlier this month, as outlined in this article below:
As I mentioned earlier, All-Cash Deals are the most common type of M&A, as the terms are very clear from the outset. For example, here are the statistics for 2020:
The main reason All-Stock Deals are not as popular is due to the increased risk involved in such transactions. There can be a significant length of time between such a deal being proposed, to it being approved by shareholders, and then meeting regulatory approval. During this period, the stock of the two companies will continue to be traded, giving investors opportunity to price in a "fair" value for what they believe each share price should be in the event of the deal going through. Such uncertainty carries intrinsic risk, hence why All-Stock Deals are less popular than the safer play of All-Cash Deals.
2. Redbox and Chicken Soup
However, I looked into what effect such proposed deals could have, when one or more of the companies involved specifically have high short interest. One interesting example is an M&A that took place this past summer involving two media firms, Redbox Entertainment and Chicken Soup for the Soul Entertainment. Here is the press release made by Chicken Soup, on 11th May 2022, annoucing their proposed buy-out:
The most relevant part of this annoucement to us here is the following:
What effect did this have on the stock of these two companies, during the course of the summer while this deal was playing out? Well, first have a look at the Short Interest in this stock - here is an article from June, when this was all playing out:
Estimated short interest in Redbox Entertainment (RDBX) has gone parabolic since early May, jumping from low 50% to mid-100% in the first half of the month and reaching a new record high of 224% this week – a 55 percentage point increase.
My conjecture is that the Short Interest increased in such a way due to "hidden" short positions being forced out into the open, by the surge in Redbox's stock price. And how did that play out? Well, here is the chart from Fintel which also shows massive amounts of FTDs as well, hence likely pointing to Redbox having quite a lot of the fuckery going on with it which has affected our own beloved GME:
It is difficult to tell from this chart, but upon the announcement of being an acquisition target for Chicken Soup, its share price fell to a low of $2.42 on May 13th. However the short squeeze that took place from late May increased the price to a peak, precisely a month later on June 13th, of $18.20 - a +652% short squeeze.
Remember, though, that these All-Stock Deals are exchanges of two companies' stock. So what happened with Chicken Soup for the Soul Entertainment's stock? A +183% short squeeze here also, again amid very high FTDs, from May 12th through to the day before the deal was finally completed on August 12th.
3. Support.com and Greenidge
Here is an example of a Combination Deal resulting in a short squeeze, this time from last year. The two companies involved in this case were the NASDAQ listed Support.com and the then-private Greenidge Generation Holdings, announced on March 22nd, 2021:
Again, here is the most notable part which details the terms of the deal:
This was a slower play than the previous example, with the merger finally being completed about six months later on September 14th, 2021. However Support.com began to make the headlines by mid-year, when the 60% Short Interest-stock began squeezing as short sellers struggled to maintain their positions:
The final upshot can be seen in the chart, prior to the stock being de-listed in the build-up to the merger:
https://fintel.io/chart/us/sprt
From a low of $2.10 just before the merger announcement, a rally that took it to a high of $59.69 on August 27th, 2021. That's a +2742% short squeeze right there...
4. DIAC and Dual
The final example I want to provide is not from the US markets, but further afield to again show what effects All-Stock M&A Deals can have on short sellers' positions. I made a post about this particular short squeeze on this sub back in February, which was an example from the South Korean markets:
https://www.reddit.com/r/Superstonk/comments/t10xpr/serves_them_right/
As per the Financial Times article:
https://www.ft.com/content/cc21e7b9-f931-4481-a82b-4ed892aa9e10
Short sellers of DIAC, whose trading was halted on the Kosdaq last March because of audit failures related to financial problems, are expecting losses after the company split and merged with its auto parts affiliate Dual through a share swap.
The short positions were worth about $13.5mn at the time of the stock suspension and had increased to $930mn as of last week, said traders. Less than five per cent of DIAC shares were held short when the stock last traded. Investors shorted the company because of uncertainty over the value of an anticancer drug it was developing in clinical trials. But since the trading suspension, the stock’s value has jumped 69 times, while Dual shares have increased more than 1,500 times from Won107 to Won161,000 (US$0.09-$164) on the K-OTC market since September.
Yes, you read that right. On just 5% Short Interest, the company called DIAC had a price jump of its stock of an approximate +6900% short squeeze. And as for the other firm involved, Dual, the article does not detail what the Short Interest was. However it was likely slightly higher, as this All-Share Deal saw its share price balloon through a +150,000% short squeeze. That's 150 thousand % for those of you at the back!
5. What does this have to do with GameStop?
Let me go back to the post I referenced in the Preface, by u/DarraghGogarty:
https://www.reddit.com/r/Superstonk/comments/y7gqdh/carl_ichan_is_not_going_to_buy_gme_shares
Let us say things play out exactly as specified above.
We know that Towel Stock is in the "Meme Basket" alongside GameStop, likely by the same short sellers, with very high Short Interest. Should Icahn Enterprises carry out step 1 above using an All-Stock Deal, it may result in a similar short squeeze to one or two of those I have exampled above of Towel Stock's shares. And then if GameStop carries out a buy-out of BABY from Icahn Enterprises, which involves an All-Stock Deal share swapping of GME, well that could result in a short squeeze of its stock.
The key here could be the 1-2 combination. Step 1 puts the shorts on the ropes, given Towel Stock's very high Short Interest. But step 2 is the final knock-out blow, as GameStop has likely the highest Short Interest ever seen in the history of capitalism... And if this were to be what takes place in the coming months then, my dear Apes, I believe it delivers MOASS.
6. TLDR
M&A deals typically involve All-Cash Deals or All-Stock Deals. All-Cash Deals are far more common, as it results in an acquisition price being set, but prevents short squeezes. However All-Stock Deals can result in continued trading of the shares of the companies involved. Until the final deal is completed, this could mean large changes to share prices. In this DD, I have provided some examples of huge short squeezes of companies that had high Short Interest, and who were undergoing All-Stock M&A Deals. If such a corporate action were to play out involving GameStop, such as through some collaboration between Icahn Enterprises and RC Ventures/GameStop, it could well mean lights out for Kenny & Friends.
No comments:
Post a Comment