The market craziness today has created some amazing buying opportunities. Here is one that Mr. Market is providing that is absurd.
Over this weekend Berkshire came out and made an offer to buy Transatlantic Holdings for $52 a share, an all-cash deal. Transatlantic Holdings is in the reinsurance business. Although this investment opportunity doesn’t require any knowledge about the insurance business or Transatlantic Holdings’ financials. Berkshire’s offer to buy the company for $52 a share is one of the most certain things in the investment world, second only to promises by US Government to pay its debt. Berkshire has never, best of my knowledge, made an offer to buy a company and then run into problems getting cash to finish the transaction. So, for all purspose I look at this offer as something that doesn’t hold any financing risk.
I think the big uncertaintly (not risk) here is Transatlantic Holdings’ board rejects this offer. Typically a board would reject an acquisition offer only if they believe the company is worth more than the offer price. There are other reasons as well, like the board believing the transaction can’t be completed due to financing or regulatory hurdles to complete the transaction. In this case, I think the biggest uncertaintly is board believing the offer price is a low-ball offer. In that case, the board would have to convince the shareholders the company, as a standalone, is worth lots more than $52 a share. If the company is worth less than the offer price, the board would be best served to accept the offer.
We know the type of companies Berkshire likes to acquire. We know the management qualities that Berkshire looks for in potential matches. So we can rule out any risk that the management and board of Transatlantic is using the company as a vehicle for personal enrichment at the expense of shareholders.
At close of day on Monday, the company’s shares were trading for $48.31 a share. The is a difference of $3.69 a share, to the offer price. So you are getting a 7.64% return on an investment if the offer closes. If the offer doesn’t close, the board has to show how the company is worth more than $52/share. There is potential upside if someone else comes and out-bids Berkshire.
The biggest downside on this investment is that the deal doesn’t close. Since we know the quality of management, based on Berkshire’s screening, you have got to believe management is top quality. So management rejecting this offer means you have a good quality management that believes the company is worth lots more than the offer price.