M&A Arb Update: Amazon Buying iRobot

TL;DR

* Having originally agreed to be acquired for $61/share in cash by Amazon in 2022, the deal price got revised down over the summer to $51.75/share

* Given the FTC’s assault on big tech, Amazon is coming under fire for its history of anti-competitive practices on the Amazon website, thus putting the deal at risk

* What was a rumored sure thing from the EU commission, they have changed their tune on the matter and believe that Amazon owning IRBT would lead to anti-competitive practices

* Given IRBT relies heavily on user data to map out their homes, the other questionable point comes in whether should Amazon have access to that level of user data

As you can see, iRobot $IRBT has had quite the rollercoaster of an acquisition journey. Here are some key dates to be aware of:

* 8/5/22 - Amazon $AMZN agrees to acquire IRBT in an all-cash deal valued at $61/share.

* 9/20/22 - FTC makes second request for more information regarding the acquisition.

* 7/16/23 - UK clears AMZN to acquire IRBT.

* 7/25/23 - Deal gets revised down from $61/share to $51.75/share, mainly driven by IRBT taking on a new $200 million credit facility to continue operations.

* 11/24/23 - Reuters announces that unconditional approval from the EU is imminent.

* 11/27/23 - EU says the deal raises antitrust concerns.

Needless to say, there’s been quite a lot of ups and downs for iRobot over the last 14 months. Regardless, I’m going to break down what’s been going on for this deal, the concerns raised by each commission, and any counterpoints to the risks.

Deal Mechanics

On top of the acquisition prices that I quoted earlier, we need to look at the original timeframe and terms of the agreement between both parties. In a filing from August 5th, 2022 (below), we can see that they marked the timeframe for “possible” termination after August 4th, 2023 — so 1 year from the original announcement date.

Additionally, in regards to the termination fee, iRobot would be entitled to receive $94 million under a few circumstances

* It takes longer than an additional year for the deal to close (two, 6-month extensions) to satisfy antitrust conditions.

* Under appeal, Amazon still loses.

Not bad and to put this into perspective, at the original offer price on August 5th, 2022, the termination fee was ~5.8% of the total market cap. Fast forward to the recent close and that fee is now ~8.6% of their total market cap.

So both parties still have time for the deal to go through but given that the EU Commission opened an investigation on July 6th, 2023 and the FTC has been on the case since a month after the initial announcement, I don’t believe that it will take that full year to satisfy.

The EU has even said that they have until February 14th to make a final decision on the matter.

But let’s talk about why there are even issues about this deal and the implications of each.

Antitrust Concerns

While the title of this section is very broad, there are a few sub-categories specifically that we need to talk about that directly lead to the EU and FTC having antitrust concerns.

Competition & Pricing Power

So when it comes to competition, several robot vacuums on the market are similar to iRobot. According to Statista, robot vacuums at the price point of $200 or more account for roughly $3.39 billion in 2020. Granted with the implications of COVID, that number has certainly gone up dramatically.

For well over a decade, iRobot fended off new entrants from some of the best-known names in vacuums — including Hoover, Black & Decker, and Bissell — and maintained its undisputed market leadership.

But even if we look at 2020 figures, iRobot only commanded 46% share of the market which I know many of you might read and think how could this deal ever happen? Don’t be too hasty though, that 46% worldwide share in 2020 is much lower than its 64% worldwide peak share in 2016, meaning that other players are doing well to compete with IRBT.

Take for example the Asian market. A company called Ecovacs Robotics is turning up the heat in its sphere of influence against IRBT. Ecovacs Robotics Deebot vacuum products range from 1,000 yuan to 6,999 yuan, or about $141 - $986 USD.

In comparison, iRobot's two-in-one top-notch model, the Roomba Combo j7+, carries a suggested price of $999.99 in the U.S. — and is apparently not officially sold in China.

While I don’t believe the real problem of antitrust concerns comes from how much market share the brand has, it’s the fact that Amazon is the one buying them. For everyone living under a rock, Amazon has been under fire over the last few years for using its ability to price out competitors on the very same marketplace it charges businesses to sell while humorously selling its own goods.

This is no bueno with the FTC and frankly, businesses in general. In its lawsuit, the FTC makes a few key points here.

Anti-discounting measures that punish sellers and deter other online retailers from offering prices lower than Amazon, keeping prices higher for products across the internet. For example, if Amazon discovers that a seller is offering lower-priced goods elsewhere, Amazon can bury discounting sellers so far down in Amazon’s search results that they become effectively invisible.

Conditioning sellers’ ability to obtain “Prime” eligibility for their products—a virtual necessity for doing business on Amazon—on sellers using Amazon’s costly fulfillment service, which has made it substantially more expensive for sellers on Amazon to also offer their products on other platforms. This unlawful coercion has in turn limited competitors’ ability to effectively compete against Amazon.

Biasing Amazon’s search results to preference Amazon’s own products over ones that Amazon knows are of better quality.

So basically Amazon is a bully to anyone but itself. And that is one of the main reasons why the commissions have a problem with Amazon buying the company.

The fear would be Amazon buying up IRBT, giving it the leverage of superior logistics, cost-based pricing, and marketing treatment to assert market dominance.

Pulling from the EU Commission warning,

Amazon could demote other robot vacuum cleaners on its platform and promote its own products with such labels as “Amazon’s choice” or “Works With Alexa.” The commission also said Amazon may find it “economically profitable” to shut out rivals.

Not a good look, but this goes directly against what its neighbor, the UK Competition and Markets Authority (CMA) had to say about the deal which was that it wouldn’t result in a lessening of competition.

Remind you, that this is the same CMA that I covered greatly during the $MSFT and $ATVI acquisition. The hardballers I believe just wanted to pound their fists on the table to get a conditional win which is why I don’t think this thing happens without some concessions.

Data Harvesting & Privacy

Amazon is already in the home robot space under the Astro brand. That weird little Wall-E-looking thing that literally no one wanted, asked for, or trusted.

But while it doesn’t vacuum anything at the moment, it still has much of the foundational technology that iRobot has to run its equipment. Meaning, that it still maps out your home, listens to conversations, etc.

Giving Amazon the data to map out your living space down to the inch might sound like an invasion of privacy, probably because it most likely would lead to that.

I mean, it’s not the first time that a hardware company spied on its customers. Take Ring for example. The doorbell security company was featured on Shark Tank and later acquired by Amazon in 2018 for $1 billion. A suit by the FTC was in regards to employees having unrestricted access to the cameras and consequently spying on women with cameras placed in their bedrooms and bathrooms.

In May 2018, an employee gave information about a customer's recordings to the person's ex-husband without consent, the complaint said. In another instance, an employee was found to have given Ring devices to people and then watched their videos without their knowledge.

In February 2019, Ring changed its policies so that most Ring employees or contractors could only access a customer’s private video with that person's consent.

All of which as a consumer you don’t want to hear. So with Amazon’s security products through Ring and Blink, which gives access to audio and video, pairing this functionality with understanding your home might set people off.

When you think about how Amazon would even try to leverage this information, the only real obvious path is to potentially recommend things in your UX to fill up space in your home. Amazon has denied this, saying

We do not use home maps for targeted advertising and have no plans to do so.

However, According to iRobot, customers can opt out of having its robots store the layout of their homes.

iRobot co-founder and CEO Colin Angle said that

iRobot does not – and will not – sell customers’ personal information. Our customers control the personal information they provide us, and we use that information to improve robot performance and the customer’s ability to directly control a mission.

But when you want to talk about customer data, Amazon was sti