iRobot and Amazon merger arbitrage

The opportunity that offers a 48% upside from current levels

• In 2022-08-05, Amazon $AMZN announced an all cash deal to buy iRobot $IRBT at ~ 1.7 B including debt, which equates to 61.00 $ / share. iRobot is currently trading at ~ 41 $ a share, which represents ~ 48 % upside and a spread of 20$/ share.
  
  As of 2023-02-15, the deal is subject to a second request by the FTC, as the acquisition is under scrutiny for privacy concerns.
  
  Why is Amazon interested in acquiring iRobot?
  
  The acquisition offer made to iRobot displays Amazon desire to increase their footprint into the customer’s home. One could debate that iRobot is a promising fit with Alexa, Eero and Amazon Ring; all components already part of their growing smart home ecosystem.
  
  Why is this deal subject to a second request by the FTC
  
  Privacy concerns are mainly the issue behind the delay. Several concerns related to giving interior maps of homes and data in the hands of Amazon are the reason behind the pending approval of the acquisition.
  
  
  Why I think the deal goes through
  
  It would be difficult to justify FTC blocking the deal, for following reasons:
  
  1-Sen. Warren claims Amazon will dominate home technology with this acquisition. One may argue that this statement is hard to defend considering increasing competition from LG, Dyson, Neato Robotics, Samsung, Endurance, Husqvarna, Trifo and AnKobot
  - (With products such as NeatoD10, Eufy RoboVac 25C, Roborock S7, Thamtu G10 Robot Vacuum, Ecovacs Deebot N8 Pro +, Shark Ion Robot Vacuum, Yeedi Vac 2, Dreambot D10+, iLife A11, Samsung Jet Bot AI+ and others like SharkNinja )
  - The argument of Amazon dominating home technology is rather unfounded when considering Amazon is on pace to lose 10 B this year due to Alexa.
  2- Privacy concerns related to data collection remain largely speculative, as iRobot main role is to clean and vacuum floors.
  3- Amazon has 60 B in cash, more than enough to go ahead and fund the deal.
  4- iRobot deal hardly moves the needle for Amazon.
  - Currently valued at 1,105 B market cap, Amazon is 650 x bigger than iRobot (under Amazon proposed deal at 1.7 B market cap).
  5- iRobot is currently exposed to consumer-spending pullback.
  - The company has failed to deliver profitable results last year, as well as last quarter. Their survival is not guaranteed, especially considering $IRBT current cash burn rate (-0.27 eps ttm). It may be difficult to keep competing alone in this current macro environment.
  6- iRobot has been losing market share to competitors
  - (63% market share in 2014 to 46% in 2020).
  - During that same time, Ecovacs more than doubled its market share (from 7% market share to 17% market share in 2020)
  7- On 2023-02-15, an Amazon spokesperson confirmed they are in talks with regulators and signaled they are ‘’working cooperatively with the relevant regulators in their review of the merger’’.
  - I believe this statement signals strong conviction for Amazon to pursue the iRobot acquisition.
  8- As seen on Douma & Schreuder, 2013, chapter 13, ‘’Serial acquirers” appear to be more successful with M&A than companies who make an acquisition only occasionally. One could point out Amazon’s acquisition history and make the claim that Amazon find themselves in a familiar situation with iRobot
  
  There is reason to believe that the benefits of this deal may outweigh any other concerns, as its possible customers may get a cheaper and more efficient product under Amazon leadership.
  
  Insiders
  
  IRBT always had consistent insider selling activity during their history, as seen on regulatory filings. However, the last insider selling transaction date I could find was 2022-06-13, which was before the acquisition news by Amazon announced on 2022-08-05.
  
  One could argue that it shows optimism on the outlook for the deal. Insiders may believe that holding on to their shares is worth the wait if the acquisition goes through.
  
  Investors that recently bought the stock
  
  Last quarter, Lee Ainslee of Maverick Capital bought 25,727 shares for a total value of 1,238,000.00$. Although, one can acknowledge it is not a significant position, the timing of the buy position represents some great recognition of the opportunity that emerged in iRobot situation.
  
  Financials
  
  The balance sheet is clean, with 117.95 M of cash in their books and 33.25 M of debt. $IRBT does not produce FCF at this moment, nor issue a dividend.
  
  One may claim that the management desires to facilitate the acquisition process and remain attractive financially, despite recent challenges. Indeed, after latest earnings release, news broke out of cost cutting by iRobot management, announcing a layoff of 7% of their workforce.
  
  Valuation and technicals
  
  Currently trading at P/S of 0.95 and EV/Rev. of 0.89.
  
  The average volume stands at 396.56 K on 27.35 M shares outstanding, signaling no issue related to liquidity.
  
  As of January 31, 2023, the short percentage of shares outstanding was 17.06 %, $IRBT remains one of the most shorted stocks.
  
  Triple bottom around 38 $ and 52 week low standing around 35$. We believe there is good technical support going forward. A sell order at 38$ marks a 7% loss. 48 % upside if the deal closes at 61$ from current levels.
  
  Risks
  
  The main risks are following : FTC blocking the deal and Amazon terminating agreement to buy iRobot. However in that case, a 94 M termination fee would have to be paid to iRobot from Amazon. The details can be found on 8K SEC filing (2022-08-05).
  
  Catalyst
  
  The catalyst is the deal closes.