Roomba maker’s stock has shed entire deal premium as regulatory scrutiny builds
By guest author Dan Gallagher from the Wall Street Journal.
April 13, 2023
Amazon AMZN 0.11%increase; green up pointing triangle has tempted fate with deal regulators before. It would be ironic if its attempt to suck up iRobot IRBT -0.43%decrease; red down pointing triangle turns out to seal it.
The pending USD 1.7 billion acquisition of the maker of Roomba robot vacuums isn’t even Amazon’s biggest in recent history. The company shelled out USD 6.5 billion on Hollywood studio legend MGM last year and USD 3.9 billion on the parent of One Medical earlier this year. Both of those deals were announced in a time when lawmakers and regulators had their knives out for big tech, but Amazon still managed to cut through the red tape—with a bit of patience. The MGM deal took nearly 10 months to close, while the One Medical transaction took seven months. By way of comparison, the USD 13.7 billion acquisition of Whole Foods in 2017 was wrapped in less than three months.
The iRobot deal is now eight months into the process. And from the looks of it, a closure isn’t on the near-term horizon. The Federal Trade Commission has been looking into the deal since September. And last week, the U.K.’s Competition and Markets Authority, or CMA, announced that it is taking a deeper look as well to determine if the merger will result in “substantial lessening of competition.” The same body has been investigating Microsoft’s proposed takeover of Activision Blizzard since July of last year.
iRobot shareholders are clearly bracing for the worst. The stock price has fallen back in line with its 30-day average from before the deal was announced in August of last year, and is now nearly 32% below the USD 61 per share price offered by Amazon. That is 7 percentage points worse than the largest gap Activision’s shares ever registered against the price of Microsoft’s offer, which has also faced enhanced scrutiny.
There is good reason. While Activision’s business has strengthened considerably since the deal was first announced, iRobot’s has done the opposite. Revenue averaged a 30% slide over the last three quarterly reports issued since the Amazon deal was announced.
Other makers of premium consumer electronics products such as GoPro, Sonos, Peloton and Garmin also saw sales weaken in the last half of 2022, though none to the same degree. And iRobot’s business was slipping even before that; the company’s weakening sales outlook allowed Amazon to cut its offer from USD 64 a share to USD 61 during the two months of negotiations before the deal was announced, according to the transaction background outlined in iRobot’s regulatory filings.
Analysts currently expect iRobot’s sales to show another double-digit decline for the first quarter before turning positive again in the June period. But the company will be hard-pressed to make a case for the latter, as it no longer holds earnings calls or issues forecasts since agreeing to the Amazon deal. The company has also been burning cash for the last two years.
Citing lack of guidance from the company and “extreme deterioration in the business model,” Paul Chung of J.P. Morgan said in a note to clients following the company’s latest results in February that iRobot faces “a tough analysis of valuation levels if a deal were to not go through with Amazon.”
Amazon hasn’t signaled any change in its commitment to the deal. But it is hardly a case of need; even doubling iRobot’s current annual sales of about USD 1.2 billion would barely make for a rounding error on the USD 556 billion in revenue Wall Street expects Amazon to produce this year.
And iRobot’s relative small size belies the fact that it is the dominant force in robotic vacuums. The company claimed a 62 % share of the global market excluding China in late 2021—a far more dominant position than Whole Foods, MGM and One Medical ever commanded in their respective markets. That naturally gets regulators’ attention—“The iRobot deal more naturally fits the profile of the things we know this FTC is concerned about,” said Paul Gallant, policy analyst for TD Cowen. Hoovering up Roomba is proving to be no quick cleanup.
Appeared in the April 14, 2023, print edition as ‘Amazon’s Roomba Deal Keeps Getting Messier’.