Aquila and Great Plains Merger Review

The merger between Aquila (ILA) and Great Plains (GXP)  has finally been approved. The deal was first announced in February of 2007 and the deal is now expected to close on July 14. It was a long process, but certainly worth the investment.

Longer Than 1 Year

I first came across the deal while going through my routinely check on pending mergers from Merger Investing and I started to get interested after going through some initial filings and reports.

In the first post I went through the merger details and why I thought the merger had a lot of potential to close. At that time there was a spread of about 21% which was annualized to 178%.

The main reason I came to for such a large spread after going through the filings, reports and listening to the conference calls was mainly due to uncertainty related to the length of the merger and final regulatory approvals.

The Extended Merger

In the second post, I provided an update when the spread had closed to 7% and was contemplating what action to take. Do I sell or hold a little longer? Eventually I sold.

With a gain of 7% remaining and the market looking bleak, many other opportunies came up. Based on my selling principles, I chose to take advantage of one of the opportunities.

Points for Future Merger Workouts

The following reasons prompted me to invest in Aquila:

• The spread was large enough given the time frame to provide a good return on investment
• The deal was between 2 companies with great synergies
• Merger termination conditions didn’t benefit either party
• The merger was announced over 1 year ago and was still pending
• Both parties displayed they sincerely wanted the merger to materialise (due diligence from both)
• Nearly all required approvals approved

With my Aquila RSS set up, I monitored all new filings and news reports and as time progressed and insiders started to buy and vest their options, it became clear that the Missouri Commision was the only and final hurdle.

This was the type of investment where the odds of winning were 90% and losing 10%.

Lesson Learned

A mistake I made was my asset allocation. I ended up investing with too small an amount of cash. With having to pay fairly high brokerage costs for each transaction, and not being able to deposit money into my account (drawbacks of investing with 401k account only) a few percentage points of gains were eroded.

Theoretically the plan was good but my execution wasn’t up to it.

Additionally, with mergers it’s important to differentiate between news and noise. With information on the merger being scarce, there were plenty of noisy media that had to be filtered and ignored.

Luckily, this merger went through - but it could have gone the other way.

Comments

[swimjames]

do you have any knowledge of the effect of this merger on Black Hills (BKH)? I know they were buying many Aquilla properties pre-merger..