0. Preface
There is a great deal of anticipation for an M&A deal to be secured and announced ASAP. So the title of this post sounds shilly and FUDdy, right? But I have good reasons for having this hope, which is based on some previous DDs I have posted here and on the main GME sub, as well as the current price action we are seeing at the moment.
Specifically, this is because the research that I have carried out indicates the type of M&A deal can have a big impact on whether a short squeeze can occur or not. I already published a DD about this a few months ago, so much of this post is a reminder of that. However I want to also add some additional contextual information at the end, for what this may mean for the current set-up with BBBY stock.
1. Types of M&A Deals
First let us look at the three kinds of M&A deal types that are possible:
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 All-Stock and Combination 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 last summer involving two media firms, Redbox Entertainment and Chicken Soup for the Soul Entertainment. You may recall I have also written about this M&A deal, in the context of a comparison between SEC filings made by Redbox and BBBY (see my post last week: https://www.reddit.com/r/BBBY/comments/103zdvj/top_is_bbbys_statement_today_bottom_is_a/)
Here is the press release made by Chicken Soup, on 11th May 2022, annoucing their proposed buy-out:
The most relevant part of this annoucnement to us, for the topic being studied in this post, 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 also affected BBBY:
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 2021. 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 14th September 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 extreme effects All-Stock M&A Deals can have on short sellers' positions. I made a post about this particular short squeeze on the main GME sub about a year ago, which was an example from the South Korean markets:
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. So Why Could An M&A Deal Announcement Be Bad For BBBY?
The main reason these short squeezes occurred was because of two factors:
1) The stocks were heavily shorted
2) The M&A deals announced were NOT All-Cash deals
This second point is critical, as an All-Cash deal results in the stock price (basically) defaulting to the price per share offered by the acquiring company. For an acquiring company the dynamic when making such an offer is to set that price at something that is providing cost value, but also attractive enough for the shareholders of the target company to accept the deal. For BBBY, I highly doubt an All-Cash offer would be multiples of the current share price, which is hovering at about $4. On the contrary, I would be surprised if an All-Cash deal would be double figures even...
Earlier today, I made a post updating the 10x Technical Indicators that I look at for assessing the price action:
https://www.reddit.com/r/BBBY/comments/1096qmn/10x_technical_indicators_update/
I am going to post here again my analysis of one of those 10x Technical Indicators, regarding the Put/Call Ratio. Firstly the definition and Put/Call Ratio in my original post on this topic a couple of weeks ago:
From the 10x Technical Indicators, this one is looking the most interesting for me now. Here is the picture for the overall ratio, as well as specifically in the next few weeks:
The overall ratio, based on the entire options chain, has now now moved up to 0.71. However have a look at the January 20th ratio and the massive volume of open interest - both are at unprecedented levels. With the ratio on the 27th then continuing to be low, before a massive jump in early February, options traders appear to be basically betting on a huge squeeze up and subsequent drop over the next 3-4 weeks. Interestingly, the ratio is still very low through the currently available spring and summer strike dates, indicating continuous price increases even after this predicted upcoming short squeeze this month...
If an M&A deal is announced and it is an All-Cash deal, it would mean no additional price improvement can happen and the short squeeze is effectively dead in the water. However if an announcement is made and it is an All-Stock or Combination deal, then it could act as a catalyst that makes the Gamma squeeze and subsequent short squeeze inevitable. However given the vast majority of M&A deals are All-Cash deals, and I would expect any offering for BBBY to be of that form, personally I am hoping any potential M&A announcement is delayed until February. With the price action that started this week...
...and that crazy options chain, I think an M&A announcement at this precise moment in time is unncessary to launch us to Uranus. In fact, the less news there is about such a deal, the more the shorts will probably have to continue covering in light of not having any concrete data to go on. Hence the longer they can be stuck in the current situation of probably being forced to cover FTDs, having less leverage due to BBBY being of the Reg SHO Threshold List, and the all-time high CTB, the better chance the options chain forces a "January 2021 GME" situation.
6. TLDR
M&A deals typically involve All-Cash Deals or All-Stock/Combination Deals. All-Cash Deals are far more common, as it results in an acquisition price being set, but prevents short squeezes. However All-Stock/Combination 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/Combination M&A Deals.
However, the majority of M&A deals are of the All-Cash form, and I would expect any such announcement for BBBY to be of that kind. As that would prevent additional price discovery, it would also prevent the recently commenced short squeeze from continuing. Hence why I am hoping that any M&A deal announcement does not occur until nexy month, or at least well after January 20th. If so then I think a much better chance that the Gamma Ramp comes into effect, and we continue launching towards an unparalleled short squeeze based purely on market mechanics and current price action.
P.S.: This is some tinfoil conjecture, but BBBY and a potential buyer would of course be aware of all the points made in this post. They have a strong incentive to shed the shorts as well, given the stranglehold that short selling, and particularly excessive naked short selling, has on a company's stock and ability to operate. Hence could they be delaying making an announcement until a squeeze has been effected, and done and dusted? Could that be the reason we are yet to see the delayed 10-Q filing...?
No comments:
Post a Comment