What’s The Airgas Shareholder’s Motivation?
Since I found out that 23.2% of Airgas’ shares have been tendered to Air Products at $63.50 per share, all while the market price for these shares have remained above $65, I have struggled with a question: Why would someone want to offer their shares for sale at less than the prevailing price?
Now, suppose I had been an Airgas shareholder before Air Products’ $60 per share offer was disclosed back in February. Let’s say I purchased my shares at about $40 or so. I would have sold my shares immediately on the news to lock in a tidy profit. I wouldn’t want to risk that profit for a measly $2 or $3 gain later on.
The people that I would be selling my shares to would be deal arbitrageurs, often referred to as “arbs”. They earn their money specializing in buying stock of companies that have just announced deals. They hold onto their shares until the deal is consummated. For example, let’s say Company X’s shares are selling for $20 per share. It announces an agreement to be purchased by Company Y for $30 per share in a deal that is expected to be consummated in several months.
Shares in Company X will immediately jump, but not likely to $30, but rather to something like $27 or $28 per share. This is because there is always uncertainty about whether the deal will actually get done. Regulators could block the deal, Company Y would still need to do some due diligence, economic circumstances could change, and any number of other factors could scuttle the transaction. Arbs, who are deft at gauging the deal tea leaves, will happily take on the risk to make that $2 or $3 when Company Y’s purchase of Company X is completed.
This gets us back to Airgas. These arbs have been buying up the shares at above Air Products' offer prices. They can only make money if Air Products comes in with a higher offer. They will lose a lot of money if Air Products walks away. So what do the arbs want? They want Airgas to sit at the negotiating table with Air Products to hammer out a transaction that will earn them a profit.
This might explain why they have been tendering their shares. Airgas has an annual meeting in September in which three Air Products nominees can be elected to its board. It can also be forced to hold its next annual meeting in January, which would further expedite Air Products’ board stacking. A tender can indeed be withdrawn. The arbs don’t have to ultimately sell their shares for less than what they paid for them if they don’t want to. Tendering their shares, albeit temporarily, lets Airgas’ management know that Air Products might have some support going into the annual meeting. It is a signal that they want to see the two parties come to terms.