Advantest acquires Verigy

March 18, 2011

On March 18, Advantest offered to acquire Verigy for $15 per share. The conversion ratio for the converts were 76.263 but holders get an additional 8.5 shares under the make-whole matrix for a total of 84.763. 

Following the announcement, the VRGY 5.25% converts were trading at 124.75 vs 14.06 stock price. Upon completion (deal was completed on July 6), holders get cash equal to the new conversion ratio (84.763) times $15 for a total of 127.14.  This is a gain of 2.39 points plus 1.75 points of coupon for a total of 4.14 points. This was an annualized rate of return of 10%, which is less than about 20% for the stock but you have better protection to the downside. The converts have downside of 4% while the stock has downside of 8% compared to where the securities were trading the day before.

The key to this trade is whether you get to keep that last coupon that the converts is scheduled to pay out on July 15, 2011. This is where convert indenture analysis of the takeout make-whole language and analysis of the merger time line becomes important.

Verigy has up to 20 days to send out the Fundamental Change Company Notice, which will specify the Fundamental Change Purchase Date. The Fundamental Change Purchase date will be between 20 and 35 days after the Fundamental Change Company Notice. In total, the last day to convert will be between 20 and 55 days after the merger completion date.

Holders can convert in connection with the make whole any day after the effective date of the merger and the Fundamental Change Purchase date specified by the company (p 67, 72, 74). Page 57 says even if the fundamental change date is between the record and pay dates, you still get the coupon.

So if the merger closes 6/12/11, the fundamental change purchase date could be 7/2/11 (between record date 7/1/11 and pay date of 7/15/11), you can convert on 7/2/11 and keep the coupon.

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