Sometimes even the savviest market players can stumble because of events beyond their control. Consider the late-December purchase of New York defense company EDO Corp. by industrial conglomerate ITT Corp. On September 17, EDO agreed to be bought by ITT for $1.76 billion, or $56 per share. That was 9 percent more than EDO’s market value then, but less than seven times the company’s projected 2008 operating earnings. Because defense companies typically sell at multiples in the low to midteens and EDO is a key supplier of equipment for U.S. troops in Iraq, some investors and bankers believed that ITT — or a rival bidder — would wind up paying more for EDO before the deal closed.
One of those investors was SAC Capital Advisors, which, according to regulatory filings, held a 6.1 percent stake in EDO as of October 31. SAC analyst Nathan Miller told executives at other institutions holding EDO shares that he believed another bidder would top ITT’s offer, or that ITT could be pushed to pay a higher price if shareholders voted against the deal at $56 per share, according to Robert Kirkpatrick, a portfolio manager at Cardinal Capital Management, a Greenwich, Connecticut–based firm that was one of EDO’s largest shareholders. Miller and an SAC spokesman decline to comment, but people familiar with Miller’s thinking say that he was confident that an $80,000 EDO product known as a jammer, which protects military vehicles against roadside bombs, could end up in 220,000 new vehicles the U.S. has said it plans to order.
In any event, SAC — a $14 billion hedge fund firm run by Steven Cohen, long regarded as one of Wall Street’s sharpest traders — bought an additional 600,200 shares on November 12 and 13. Through a unit called CR Intrinsic Investors, SAC paid, on average, more than $57 apiece for these shares, increasing its stake in EDO to 9.4 percent, according to a November 14 regulatory filing in which SAC said that ITT’s offer was inadequate and that it would vote against the deal, which required approval by a two-thirds majority of EDO shareholders.
At about the same time, though, violence began declining in Iraq, and the U.S. began planning to draw down its troops. These events hurt the shares of comparable defense companies. Unable to persuade enough shareholders to join it in voting against the transaction, SAC in a December 17 filing said it would approve it at $56 per share, citing “current market conditions” as one of the reasons for its change of heart.
Meanwhile, the M&A market was cooling down substantially from its record pace of 2006 and early 2007. According to the merger proxy statement, only one other potential bidder expressed interest in EDO. Kirkpatrick and another investor believe the other interested buyer was likely Cobham, a U.K.-based defense company. “They talked about being in the hunt for a couple of U.S. deals, one of which was large, but they didn’t get it,” Kirkpatrick says. A Cobham spokesman declines to comment. So far this year announced M&A deals are off 37 percent from the same period in 2007, according to research firm Dealogic.
ITT’s acquisition closed December 20. SAC still made $20 million, or 21.7 percent, on its investment, having paid an average of $46 per share for its position, according to filings with the Securities and Exchange Commission.
Cardinal Capital’s Kirkpatrick says that even with the Iraq pullout, he sees opportunities for EDO to sell more jammers, which would have justified a price higher than $56. “Even if we leave Iraq, we have to reset the military,” he notes. However, he voted for the ITT deal because of his concerns about EDO’s ability to step up production to meet increased demand for its products.
EDO shareholders received a 97 percent premium over the company’s average share price during the 12 months before the agreement. Says Robert Alvine, an EDO board member, “The shareholders got a damned good deal out of this.”
