Amazon.com, Inc. (NASDAQ:AMZN) brought in a lot of positive buzz over the weekend after its $42 per share bid for Whole Foods Market, Inc (NYSE:WFM) . On Monday morning, however, traders learned something new about the $13.7 billion deal. It looks like an unmitigated market failure.
Mergers and acquisitions have to be approved by those holding shares in the target. At time of writing shares in Whole Foods Market were due to open at $42.60. That’s only a 1.4 percent premium over the price offered by Amazon, but it’s enough to send a clear signal. The Amazon bid looks too low for those who have to decide whether to accept it.
Is Amazon.com the only bidder for Whole Foods?
One of the most likely reasons for the premium on Whole Foods Market stock is the existence of other bidders. If some other firm is seen as willing to make a higher bid, shares should trade, as we see this morning, at a premium to the Amazon.com, Inc. offer. There are a number of firm’s that could be willing to pay more than $42 per share for Whole Foods Markets.
Most of these firms would have the same goal in mind: keeping Amazon.com, Inc. out of the market. The firm’s entry into widespread grocery sales is a scary prospect for the legacy firms that don’t want to be disrupted by CEO Jeff Bezos.
The question is, then, is Wal-Mart Stores Inc, (NYSE:WFM) Costco or Kroger willing to pay more than $14 billion to keep Amazon.com, Inc. off their turf? Is there another bidder, perhaps outside the grocery world, who would be willing to bet on the future of Whole Foods?
We don’t know the answer to these questions just yet, but any real information about interest from another firm would be the first sign of trouble for Jeff Bezos and his acquisition team.
What will it take for Whole Foods to settle?
If shares remain above the acquisition price on the open market, it is very likely that shareholders at Whole Foods will reject the deal. In order to close at the $42 per share price, Amazon.com, Inc. (NASDAQ:AMZN) will need to see the price of shares fall.
One way that could happen is if prospective bidders came out and stated that they would not make a new bid for the firm. If somebody could convince Wal-Mart Stores Inc CEO Doug McMillon to say he has no interest in buying WFM that could go a long way.
Another move that could have a big effect is a major shareholder saying that they support the Amazon bid. The more likely the bid is to be accepted, the closer to $42 the shares should trade at. Jana partners may be the most effective here.
The firm has been running an activist campaign at Whole Foods Market, Inc (NYSE:WFM), and could be a major source of protest if shareholders really are expecting a higher offer. Jana Partners currently owns 9 percent of Whole Foods Market.
Watch out for activist interference
Whatever the firm says about the Amazon deal, and it has been publicly silent so far, could have a huge effect on the way other shareholders approach the offer. We saw this kind of behavior during the battle to take Dell private.
The news this morning, and over the last few days, has circled around how Jana had “hit a home run” with the Whole Foods Amazon tie-up. But if people were unselfish hedge funds wouldn’t exist. Jana may see an opportunity to pull in more than the hundreds of millions the current Amazon offer promises.
Whole Foods CEO John Mackey has previously called the activist fund ‘greedy bastards.’ Jana was, according to CNBC, not part of the discussions with Amazon.com, Inc. and the firm didn’t know about the deal before it was announced to the public. That means it’s going over the specifics right now and deciding what way it will vote.
The internal activist battle at Whole Foods may be the thing most likely to gum up the works for Amazon, but we’ll have to wait for the response from the fund to be certain.
How did Amazon end up in this position?
Major acquisitions like the Whole Foods buyout are very complex. Companies, in general, do their best to keep shareholders happy when they want to close a deal. If they’re not satisfied, there’s a large number of devices they can use to stall, or even kill, a buyout.
Amazon.com, Inc. (NASDAQ:AMZN) didn’t set its price high enough to discourage shareholders searching for a better offer. It’s clear from the price of Whole Foods stock that at least some are even betting that there is a better offer to be had. That can change very quickly depending on the actions of other players in this game.
The key people to watch will be Barry Rosenstein – Managing Partner and Co-Portfolio Manager at Jana and Wal-Mart CEO Doug McMillon. Whatever they choose to say publicly about the Amazon-Whole Foods deal will likely guide the firm’s stock price going forward.
Does Amazon stock depend on Whole Foods?
The Whole Foods Markets story is the dominant one around Amazon stock right now, but it would be wrong to think it’s the main driver of the firm’s stock price. That said, when it announced the acquisition shares certainly bounced. Amazon stock was still set to open higher on Monday morning despite the risk that it will end up paying more for Whole Foods than first reported.
Amazon.com, Inc. (NASDAQ:AMZN) stock has been on a major run for years, and Whole Foods, so far at least, seems to be a smallish move. Over the last twelve months Amazon stock has increased by more than 40 percent. That makes it one of the best large-cap performers on Wall Street over the period.
At the moment it seems clear that traders see a new bid for Whole Foods as probable. The firm’s stock was set to continue rising on Monday. With such a conservative downside, so long as Amazon doesn’t pull its bid, there’s a lot of reasons to see it as a risk worth taking.
Jeff Bezos and the other big execs at Amazon have big plans for Whole Foods Market, Inc (NYSE:WFM). That much is clear from the $13.7 billion offer for the firm. With so many balls in the air, however, a failure to close the deal won’t be a disaster. As with the Fire phone investors will allow the firm time to make up for its mistakes.