Chul Min Lee

HW #3

Summarize the deal terms involved in the 10 top deals in 2016.

Baxalta (BXLT)

Acquirer: Shire plc (SHPG)

BXLT shareholders will get $18 in cash and 0.1482 Shire ADS per share. This results to a total value of
$45.50 per BXLT share and deal value of $32 billion. This is approximately 37.5% premium to BXLT’s
share price prior to the announcement. This will result BXLT shareholders with a 34% ownership of the
combined company. SHPG plans to fund this merger with a flexible bank facility. Shire intends to
refinance the bank facility through additional debt issuance in due course. The financing has been
structured so that the SHPG will maintain investment grade credit rating. The deal is expected to close
by mid-2016.

LinkedIn (LNKD)

Acquirer: Microsoft (MSFT)

LNKD shareholders will get $196 in cash per share. This results to a deal value of $26.2 billion. LinkedIn
with remain a separate entity from Microsoft and the current CEO will remain. MSFT plans to fund this
merger with issuance of new debt. The deal is expected to close by the end of 2016.

St. Jude Medical (STJ)

Acquirer: Abott (ABT)

STJ shareholders will get $46.75 in cash and 0.8708 Abott common stock per share. This results to a total
value of $85 per STJ share and a deal value of $25 billion. ABT will assume or refinance all debt of STJ.
STJ plans to issue additional common stock in the secondary market of $5.7 billion to rebalance its
capital structure. STJ has another pending transaction of acquiring Alere Inc. The deal is expected to
close by Q4 of 2016.

ADT Corp (ADT)

Acquirer: Apollo Global Management, LLC

ADT shareholder will get $42 in cash. This results to a deal value of $15 billion. This is approximately 56%
premium to ADT’s share price prior to the announcement. The merger will be financed primarily through
the incurrence of $1.555 billion in new first lien term loans, $3.140 billion in new second lien financing,
the issuance of $750 million of preferred securities to an affiliate of Koch Equity Development LLC, the
investment and acquisition subsidiary of Koch Industries, Inc., and an equity contribution of
approximately $4.5 billion from funds managed by Apollo and co-investors. The deal is expected to close
by June 2016.

Tyco (TYC)

Acquirer: Johnson Controls (JCI)

Immediately after the merger TYC will effect a reverse stock split so that TYC shareholders will receive a
fixed exchange ratio of 0.9550 for each of their existing TYC shares in return for the combined company
shares. JCI shareholders may elect to receive either one share of the combined company for each of JCI
shares or cash equal to $34.88 per JCI share. This results to a deal value of $3.9 billion. The deal will be
tax-free for TYC shareholders, but taxable for JCI shareholders. TYC has secured a bank facility of $4.0
billion to finance this merger. The deal is expected to close by the fiscal end of 2016.

Columbia Pipeline Group (CPGX)

Acquirer: TransCanada (TRP)

CPGX shareholders will get $25.5 in cash per share. This results to a deal value of $13 billion. This is
approximately 11% premium to CPGX’s share price prior to the announcement. TRP will assume CPGX’s
$2.8 billion of debt. TRP will finance this deal through sale of its assets and issuance of new common
stock. It also has secured a bridge term loan credit facility of $10.3 billion with a syndicate of lenders.
The deal is expected to close by the second half of 2016.

Westar Energy (WR)

Acquirer: Great Plains Energy (GXP)

WR shareholders will get $51 in cash and $9 in GXP common stock per share. The GXP common stock is
subject to 7.5% collar based upon the GXP common stock price at the time of the closing of the
transaction. The exchange ratio for the stock consideration ranges between 0.2709 to 0.3148 shares of
Great Plains Energy common stock for each Westar share of common stock and represents a
consideration mix of 85 percent cash and 15 percent stock. This results in a deal value of $3.6 billion.
GXP is financing this merger through a combination of equity, equity-linked securities and debt. This will
allow GXP to maintain investment grade credit ratings. The deal is expected to close by spring of 2017.

Valspar (VAL)

Acquirer: Sherwin-Williams (SHW)

VAL shareholders will get $113 in cash per share. This results to a deal value of $11.3 billion. This is
approximately 41% premium to VAL’s share price prior to the announcement. If VAL divestures totaling
more than $650 million are incurred then the offered share price will be lowered to $105 in cash per
share. SHW will have the right to terminate the deal when VAL’s divestitures exceed $1.5 billion. SHW
intends to finance the transaction through a combination of cash on hand, liquidity available under
existing facilities and new debt. The deal is expected to close by the end of Q1 2017.

ITC Holdings (ITC)

Acquirer: Fortis Inc. (FRTSF)

ITC shareholders will get $22.57 in cash and 0.7520 FRTSF shares. This results to a deal value of $11.3
billion. This is approximately 33% premium to ITC’s share price prior to the announcement. Financing for
the cash portion of the acquisition will be achieved primarily through the issuance of approximately
US$2 billion of FRTSF debt and the sale of up to 19.9% of ITC to one or more infrastructure-focused
minority investors. The deal is expected to close by late 2016.
Ingram Micro (IM)

Acquirer: Tianjin Tianhai Investment Company, Ltd

IM shareholders will get $38.90 in cash. This results to a deal value of $6 billion. This is approximately
39% premium to IM’s share price prior to the announcement. The deal is expected to close by the
second half of 2016.

How would a hedge fund trade each of the 10 top deals (in the traditional sense “buy-the-target”)?

Ideally the hedge fund would initiate a merger arbitrage whereby they would acquire a large position of
the target under the offer price of the merger transaction. When the merger transaction deal goes
through then the hedge fund will be paid the difference of the two prices.
Target After Offer % Difference Buyer Green lighted are the
BXLT 39.10 45.50 16.37% SHPG top 3 returns possible
LNKD 192.21 196.00 1.97% MSFT from merger
STJ 77.79 85.00 9.27% ABT
arbitrage. (After price
ADT 40.62 42.00 3.40% Apollo Global Management
is the closing price on
TYC 34.15 34.88 2.14% JCI
CPGX 24.84 25.50 2.66% TRP
the day the merger
WR 56.33 60.00 6.52% GXP was announced.)
VAL 101.00 113.00 11.88% SHW
Deals are arranged by
ITC 39.29 48.00 22.17% FRTSF
descending order of
IM 36.34 38.90 7.04% Tianjin Tianhai Investment Company
deal size.

Pick 3 trades that you would propose that our hedge should put on. Defend your trade ideas with a
detailed justification on why these are good trades.

The 3 trades that I believe that our hedge fund should put on is the LNKD-MSFT, WR-GXP, and CPGX-TRP
deals. There are not merger arbitrage trades that has the highest return potential. Here are my reasons:

This is an arbitrage therefore higher returns are not of importance. The trade should incur no to
negligible risk. Therefore, the strength of the merger contract will determine the risk involved in the
arbitrage. The factors that affect the strength of the merger are: shareholder compliance, regulatory
(anti-trust), financing.

All these mergers proposal gained positive reaction from the shareholders and is expected to pass the
voting process without much friction. There are no major regulatory issues at stake because the two
that are merging are in different fields (MSFT is software and hardware while LNKD is social network) or
the merger will not create an undue geographical monopoly to dominate the market. Therefore, there
are no reasons that regulatory agencies will prevent the merger from taking place. Both the WR-GXP
and CPGX-TRP deals have comprehensive financing plans that will not put the acquirer at a credit risk, in
which the acquirer would face outside pressure from the shareholders to drop the merger transaction.
The only concern is the LNKD-MSFT deal, whereby MSFT will be financing the majority of the transaction
through new debt. However, MSFT is a colossal corporation that is able to take on that financial
leverage.