Why did Y sell?

Aside from a 30% premium, why did Alleghany sell?

Was it a known ‘for sale’ business to Mr. Market? There are always reasons, public or behind the scenes…

Maybe it was just good timing? WEB made a cold call?

m

Barrons is reporting that Berkshire initiated the transaction. No clue why Alleghany decided to sell now and to sell for cash. I imagine a BRK.B stock deal was not offered. Joe and others had purchased shares in December and March if I remember correctly. Joe bought a lot in December. The merger proxy will be interesting to read, although background of the deal ought to be pretty short since it came together in a couple weeks or less.

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Seems like BRK initiated this one. This is the 1st time I have seen a “go-shop” provision

Under the terms of the definitive merger agreement, Alleghany may actively solicit and consider
alternative acquisition proposals during a 25-day “go-shop” period. Alleghany has the right to terminate
the merger agreement to accept a superior proposal during the go-shop period, subject to the terms
and conditions of the merger agreement. There can be no assurances that the “go-shop” process will
result in a superior proposal, and Alleghany does not intend to communicate developments regarding
the process unless and until Alleghany’s Board of Directors makes a determination requiring further
disclosure

https://www.berkshirehathaway.com/news/mar2122.pdf

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Yes, Berkshire initiated this deal. And they must have done so after March 8th, or Alleghany’s CFO will have an issue with the SEC.

Wabuffo made a good point on why Alleghany might have said yes on another board:

"From the seller POV.

The sellers we’re talking about are smart & and as they look out, they see falling bond prices (and equity values). Not much fun when you are holding a large bond (and to some degree equity) portfolio."

I watched the 2021 podcast link posted earlier today on this board. Well worth watching to hear Weston Hicks’ management and investing views.

One aspect jumped out to my ears: Hicks mentioned how Blackstone et al, today’s mass holders of index shares, are a voting concern going forward regarding ESG pressures. He said privately owned and private equity companies are not subject to ESG oversight matters to the same degree as publicly owned companies and thus “may” more optimally operate their businesses going forward. Berkshire is not nearly as much owned by index funds as Alleghany and perhaps this is a factor in getting under Berkshire’s umbrella with this acquisition.

I know from reading histories, biographies, business case histories and the like, an uttered sentence or two is often the window into how major changes take shape. Perhaps ESG and the big index fund aggregators are a growing concern for public company CEOs.

Uwharrie

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This is the 1st time I have seen a “go-shop” provision

Yes, it is indeed odd that there is a go-shop provision, particularly since there doesn’t seem to be any break-up fee. The right to terminate this merger agreement is ‘subject to the terms and conditions of the merger agreement’, which I don’t think we have, so I suppose there could be a break-up fee mentioned there, but in that case I would have expected it to be announced, which it wasn’t, so …

Alleghany’s shares have jumped to $842, within 1% of the proposed $848 takeover price, so Mr Market doesn’t think there will be a higher offer.

This has been on my list of possible buys for years. I guess I can take it off now, since I don’t happen to have $12-13b lying around right now.

dtb

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Alleghany’s shares have jumped to $842, within 1% of the proposed $848 takeover price, so Mr Market doesn’t think there will be a higher offer.

Actually market thinks there are going to be higher offer. Otherwise, the price will not come this close. At the minimum you should factor 2 to 3 quarters to close the deal and the interest rate for that requires 2% spread for the merger arb funds.

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Alleghany’s shares have jumped to $842, within 1% of the proposed $848 takeover price, so Mr Market doesn’t think there will be a higher offer.
======
Actually market thinks there are going to be higher offer. Otherwise, the price will not come this close. At the minimum you should factor 2 to 3 quarters to close the deal and the interest rate for that requires 2% spread for the merger arb funds.

Fair enough. I should have said that Mr Market thinks there is only a small chance that there will be a better offer, since the share price has risen to less than 1% above the share price offered, minus interest (6-month treasuries are 0.79% per annum right now.)

dtb

One aspect jumped out to my ears: Hicks mentioned how Blackstone et al, today’s mass holders of index shares, are a voting concern going forward regarding ESG pressures. He said privately owned and private equity companies are not subject to ESG oversight matters to the same degree as publicly owned companies and thus “may” more optimally operate their businesses going forward. Berkshire is not nearly as much owned by index funds as Alleghany and perhaps this is a factor in getting under Berkshire’s umbrella with this acquisition.

Not only is Berkshire less owned by the index funds, voting shares are controlled by a small cadre of “insiders”. Berkshire can be considered a high walled sanctuary from the invading index and ESG hoards.

Recall what Charlie recently said at the DJCO meeting:

"Charlie Munger: That’s another thing that’s coming. We have a new bunch of emperors. They’re the people who vote the shares in the index funds. Maybe we can make Larry Fink and the people at Vanguard Pope.

All of a sudden, we’ve had this enormous transfer of voting power to these passive index funds. That is going to change the world. I don’t know what the consequences are gonna be, but I predict it will not be good. I think the world of Larry Fink, but I’m not sure I want him to be my emperor.

https://junto.investments/daily-journal-2022-transcript/

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Alleghany’s shares have jumped to $842, within 1% of the proposed $848 takeover price, so Mr Market doesn’t think there will be a higher offer.

Actually market thinks there are going to be higher offer. Otherwise, the price will not come this close. At the minimum you should factor 2 to 3 quarters to close the deal and the interest rate for that requires 2% spread for the merger arb funds.

Alleghany is trading above $850 today (compared to Berkshire’s purchase price of $848.02), so Mr. Market seems pretty confident there will be a higher offer.

me: Alleghany’s shares have jumped to $842, within 1% of the proposed $848 takeover price, so Mr Market doesn’t think there will be a higher offer.

kingran: Actually market thinks there are going to be higher offer. Otherwise, the price will not come this close. At the minimum you should factor 2 to 3 quarters to close the deal and the interest rate for that requires 2% spread for the merger arb funds.

ras (April 1st): Alleghany is trading above $850 today (compared to Berkshire’s purchase price of $848.02), so Mr. Market seems pretty confident there will be a higher offer.

One week later, shares are at $849, about the same. Still, I agree with kingran and ras who suggest that the price level allows us to infer that the market believes that a higher offer is a possibility, although I would not say that it believes this with very much confidence.

Assuming kingran’s 2% spread is about right, shares should be 2% less than the offered $848 if we were sure the Berkshire offer would be the final one and that it would go through; in other words, about $831.

One way of estimating the probability of this is to look at the probabilities of the Berkshire deal falling through (reneging, or regulatory refusal), vs going through, vs a higher offer. If the deal falls through, the price might well drop back close to where it was before the offer, about $677. I would say this is very low probability, not more than 2%. Say that the likelihood of a higher offer is x, and so the likelihood of the current deal going through at $848 is 100%-2%-x. Finally, if we could estimate the amount that might be offered if someone jumps in and offers a higher price, I think we can assume that a 5% premium would have to be offered for it to be taken seriously, given the reliability of the Berkshire offer. I think an even higher offer (from Berkshire, for instance) is unlikely enough that we can ignore that possibility. If so, we get

6772%+848(100%-2%-x)+890*x=849. Now we can solve for x, and get

13.54+831.04-848x+890x=849, so

42x=849-831.04-13.54=4.42

which would mean x=4.42/42= 10.5%

In other words, the market gives a 10% probability of a 5% better offer, if it expects a 2% chance of a share price fall back to 677. There are a few assummptions here: if the chance of the latter is only 1%, then the same calculation leads to the probability of our 5% better offer being only 6%. If the better takeover offer were 10% better instead of 5%, that would mean the market sees an even lower probability of a takeover offer.

All in all, I would say the current price is highly suggestive that the market expects the deal to go through as is. If you think there is a probability of more than 5%-10% of a substantially higher offer (say at a price 10% better or more), then buying shares at today’s price would be a good bet. But it doesn’t sound like a good bet to me.

dtb

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Assuming kingran’s 2% spread is about right, shares should be 2% less than the offered $848 if we were sure the Berkshire offer would be the final one and that it would go through; in other words, about $831.

After hours price is $834. I am not advocating anyone to buy Y for that 2% spread. That’s is merger arb’s game. But this is the normal price action. There are times the acquiring company continued to buy shares in the open market. Not usual, but not very unusual either. Given Berkshire’s cash pile (they don’t need to borrow money to close the deal, and have cash in the bank) and given the dividend on Y, it may make sense for Berkshire to buy the stock on the open market. Normally companies hesitate to do this, because they don’t want to accumulate during due diligence period or for other reason they have to walk away.

I am not expecting any such scenario here. This is a handshake deal and I don’t see WEB walking away.

This arb talk reminds me of Buffett describing “workouts” in 1964. I believe he described overtime he made about 20% return back in the day given leverage. The Master!

“[Workouts] are the securities with a timetable. They arise from corporate activity – sell-outs, mergers, reorganizations, spin-offs, etc. In this category we are not talking about rumors or “inside information” pertaining to such developments, but to publicly announced activities of this sort. We wait until we can read it in the paper. The risk pertains not primarily to general market behavior (although that is sometimes tied in to a degree), but instead to something upsetting the applecart so that the expected development does not materialize. Such killjoys could include anti-trust or other negative government action, stockholder disapproval, withholding of tax rulings, etc. The gross profits in many workouts appear quite small. A friend refers to this as getting the last nickel after the other fellow has made the first ninety-five cents. However, the predictability coupled with a short holding period produces quite decent annual rates of return. This category produces more steady absolute profits from year to year than [undervalued stocks] do. In years of market decline, it piles up a big edge for us; during bull markets, it is a drag on performance. On a long term basis, I expect it to achieve the same sort of margin over the Dow attained by [undervalued stocks].”

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I believe he described overtime he made about 20% return back in the day given leverage.

IN financial markets most edge are ephemeral. Now you have many multi billion hedge funds operate as ‘merger-arb’ funds. They have scale, access to various hedging and leveraged cash. Pretty much most individual investors are taken out.

While it lasted, I used to buy REIT preferred’s that are slightly under water, where the management had declared their intention to recycle or redeem them. It lasted about 3 years, eventually many funds got into that game, only high risk securities were available for individual investors.

What works for someone with billions of $$$ at their disposal may not work for someone even if they have few millions.