Delphi Absorbed by the Borg 🚙

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Delphi Absorbed by the Borg

Hot of the press, BorgWarner is buying out Delphi Technologies in an all-stock merger! The combination of both auto parts makers will create one enormous one-stop shop for electric car components. 

The moment the news broke of this $3 billion market transaction, one hundred Invstrs captured a 60% surge in Delphi stock. What a haul, but those gains are past. Now, hundreds are hovering above the stock, playing the “merge arb” game, and waiting for their time to strike. Here’s their playbook!

Delphi traded hands for around $10 per share before BorgWarner put its premium buyout offer on the table. That raised the stakes to $16 per share (creating the 60% bump) but the merger isn’t a done deal yet. A ‘workout process’ must now be followed to get it over the line. If nothing upsets the applecart, “the transaction is expected to close in July of 2020.”

Of course, July is the goal, not the plan. Delphi Tech had lost half its market value before this news broke, so markets could start doubting the merger. Market players could lose faith and bail, hit the sell button, and create the dip “merge arb” investors want!

Investors following the merger process with great interest will willingly feed off scraps of info. If they feel convinced that approval of the merger is a shoo-in, every dollar that Delphi trades under $16 is a dollar of profit come July 2020. 

Their job, in the meantime, is to look for red flags and choke points that could stifel proceedings and make Delphi a good short all the way back down to $10. For example, not all shareholders might welcome this merger. To vote it through, management may need to control the votes with significant insider ownership of the stock. That way, they outweigh the voting power of those who believe Delphi can do better on its own.

Regulators also need to give “BorgDelphi” the nod. Plus, the deal could be scuppered by major disruptions to either of these businesses before July. As cars become shared, connected, autonomous, and electric, the auto sector has never innovated so aggressively. 

BorgWarner is clearly taking a big risk. It’s forking out far more than the market ever expected for Delphi, and that’s partly why shares fell 7% yesterday. Done deal or a dumb deal?

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