Special Situation: Fitbit / Google take over
Disclaimer: This is not investment advice. DO YOUR OWN RESEARCH !!!
Readers of my blog might remember that I already owned Fitbit in late 2018 at 5 USD per share. I was lucky to sell the stock with a small profit before the stock lost more than half of its value in summer 2019:
This is what I wrote initially as part of the investment case:
if the founders would decide to sell now, I think the price for a take over would be significantly higher than the current stock price. Theoretically FitBit could be an interesting target for players like Microsoft, Google or even Amazon who want a quick entry into the corporate health care sector
Well, maybe someone from Google read my blog, but actually they did make a bid at USD 7,35 per share in November 2019.
Interestingly, the FitBit stock price jumped to 7,14 USD per share directly after the announcement (from an “undisturbed” level of around 3,50 USD) but then the stock price slowly declined even before the current carnage.
So where is the problem ? Google has obviously the means for the purchase, and the founders of FitBit are willing to sell as they seem to have realized that competing with Apple doesn’t work out.
On top of that, there is a 250 mn USD termination fee to be paid by Google if the deal doesn’t work out.
The issue here seems to be regulatory risk. For instance, the “European Data Protection Board” has voiced concerns as wellas US antitrust experts.
However, Google has a 250 mn USD incentive to fight this through although of course this could take some extra time. For Google this is also a strategic move to be able to compete better with Apple and i don’t think they give up easily and have prepared themselves for the regulatory battle.
One additional remark here: I am not sure if this is thought too far, but in the times of Covid19, it would make actually a lot of sense to track both, people’s movements and vital signs. South Korea for instance has used position tracking for infected persons in order to warn potentially endangered Koreans. So adding vital signs to people’s profile might become popular quite soon.
So let’s look at the implied odds against my estimate at a share price of currently 6,20 USD per share:
This is a very simple analysis and the 90% probability is my own, “gut feeling” based estimate. Of course, the downside if the deal breaks could be higher after the recent market carnage, on the other hand I do think that there are other potential buyers that might step in.
I had established a 4% position last week at ~6,30 USD per share. So far the position survived this week quite well. If however enough buying opportunities show up, I might sacrifice (or pare down) FitBit for more long term quality opportunities in the coming weeks/months.
As mentioned in my first “panic journal”, these positions are “behavioural parking” positions for me to slow down my urge (and greed) to buy a lot right now.
value and opportunity 
Sold my Fitvit shares today at 6,10 USD/share. In EUR more or less flat vs. purchase price.
Reason: Create more cash for the coming days.
Thank you for the interesting post. A few questions:
1. The investment thesis is all about the true success probability being higher than the implied one because regulation risk fears are overblown: in support of this you cite the 250M break-up fee, but we are talking about Google here: that’s 0.5% of their 2019 EBITDA. Of course they’ll do their best to make it happen, but the regulatory outcome doesn’t depend on their eagerness to buy, it depends on the regulator: do you have any insight/edge on the topic that makes you confident about the deal closing?
2. Regarding the downside risk, if the deal falls apart, there might or might not be other interested buyers, but even if there are it takes time to negotiate a deal. In the meatime, in this environment, the price can go everywhere (mostly down): this is not exactly the profile of “a place where to park cash”.
3. Finally, you call your 90% estimate a “gut feeling”, but this boils down to “I think this is undervalued because I think this is undervalued”: it looks more like speculation than investing.
4. Assuming everything goes as planned (wich I sicerely wish you), you’ll get 12% in a year: isn’t cash worth more than that in the present predicament? I guess the answer is subjective but I would say yes.
5. As for the “behavioural hedging” argument, nobody knows where the bottom will be, so why should it be one year from now?
Thank you very much in advance if you’ll take the time to answer all my ramblings and of course
Good luck! 🙂
“Elliott”, thank you for the questions.
One comment upfront: If you read my blog, you might know that I do these kind of special situations on a regular basis, which is the only way to do this. Of course in every single case my assumptions might be wrong, but over a longer time hopefully I am better than the average.
To your questions:
1. The investment thesis is all about the true success probability being higher than the implied one because regulation risk fears are overblown: in support of this you cite the 250M break-up fee, but we are talking about Google here: that’s 0.5% of their 2019 EBITDA. Of course they’ll do their best to make it happen, but the regulatory outcome doesn’t depend on their eagerness to buy, it depends on the regulator: do you have any insight/edge on the topic that makes you confident about the deal closing?
–> I think for Google there is a principle question at stake: Are they allowed to take over other companies that have a lot of data (in this case via Fitbit’s devices) on persons ? Google will not dominate the market for these devices (Apple already is) and a defeat will then be used as an example in any other case. So yes, the 250 mn USD is not much for Google, but I think they will fight this to the very end. And of course I might be worng
2. Regarding the downside risk, if the deal falls apart, there might or might not be other interested buyers, but even if there are it takes time to negotiate a deal. In the meatime, in this environment, the price can go everywhere (mostly down): this is not exactly the profile of “a place where to park cash”.
–> Yes of course this is not a 100% secure cash deposit and apologies for maybe formulating this in a misleading way. Nevertheless, for me it is an interestin UNCORRELATED bet with an attractive risk/reward.
3. Finally, you call your 90% estimate a “gut feeling”, but this boils down to “I think this is undervalued because I think this is undervalued”: it looks more like speculation than investing.
–> Again please read above. I do think that the deal is very likely to close. I could be wrong. If I am wrong I will factor this in in future similar situations.
4. Assuming everything goes as planned (wich I sicerely wish you), you’ll get 12% in a year: isn’t cash worth more than that in the present predicament? I guess the answer is subjective but I would say yes.
–> see above, I do think the expected return (based on my probabilities) is attractive and it is an UNCORRELATED risk
5. As for the “behavioural hedging” argument, nobody knows where the bottom will be, so why should it be one year from now?
–> Exactly, no one knows and I don’t even know when the deal actually settles (if it does). The 1 year was just an assumption. COuld be quicker, could be slower.
As a summary: This is mostly interesting for people who do these deals on a regular basis and are looking for relatively uncorrelated risk. For any “Normal” investor, this deal in the current situation might be a bad fit.
I believe these special situation investments are a good way to put cash to work without experiencing current stress levels from market movements