Posted by: Aaron Pressman on May 7, 2008
Money-losing wireless broadband provider Clearwire (Symbol: CLWR) announced a convoluted deal to merge with a similar unit of Sprint Nextel (S) this morning. Although the press release (PDF)and numerous media stories made frequent reference to a mythical price of $20 a share, Clearwire shares closed today at $16.22. How can that be?
There’s a simple explanation — well, it’s simple because it’s all so darn complex. Unlike a regular merger, where shareholders get a price for their stock, this is a complex restructuring that doesn’t pay anyone cash but rather gives them shares in a newly formed company with the same name and ticker symbol. Each shareholder gets one share in new stock for each share of old stock.
But the new bigtime investors like Comcast (CMCSA) and Time Warner Cable (TWC) get a different deal. Their investments will be valued in new shares at between $17 and $23, depending on how new Clearwire shares trade in 15 randomly selected trading days out of the 30 trading days just prior to 90 days after the deal closes. If the new shares trade outside the range, the new investors would face an immediate profit or a quick loss. The market’s currently betting that the new shares will trade at the low end minus a discount for the delay in closing the deal of about 9 to 12 months.
You’ll notice that even in the unlikely event that new Clearwire’s shares take off, the ranged merger price will never match the company’s IPO price of $25 from last March. Anyone who bought at the IPO, which we tried to warn you about back then, is a validated loser now.
Of course, it’s a much different equation for the big companies and insiders that provided initial funding for Clearwire. As the company’s IPO prospectus explained last year, those insiders, including Intel (INTC), Motorola (MOT) and Craig McCaw, paid an average of $11.35 for their shares. So the merger agreement provides a guaranteed win for them.