NetScout Systems Inc. (NTCT)

[Enterprising Investor]

Better Than The Berkshire Hathaway? Danaher's Value (7/13/15)

http://seekingalpha.com/article/3319095-better-than-the-berkshire-hathaway-danahers-value

The new NTCT has over 30% upside

The newly merged company will generate about $164 million in combined net income and will further take advantage of an additional $50 million in cost synergies in conjunction with the merger for a total of $197 million in net income once combined (net of taxes). Using our DCF methodology for NTCT, this would translate to an implied share price of $47.44 once the merger is complete, a 30% premium to today's price of $36.32 for NTCT.

What made this split-off and merger interesting for DHR holders was that it was structured to give DHR holders new NTCT shares at a 7.5% discount. However, in order for that to apply the shares of DHR and NTCT needed to trade within a given price band and shares need to be tendered on July 13th. For DHR holders, the mechanics for the tender offer are as follows.

Number of Newco common units = Number of shares of DHR common stock tendered, multiplied by the lesser of:

A: 2.4

or

B: DHR VWAP stock price divided by 93% of NTCT VWAP

If the 3-day VWAP of DHR and NTCT triggers the exchange ratio limit of 2.4 to go into effect, then DHR shareholders actually may pay a premium for each share of NTCT. One can monitor this price movement here. On July 10th, the exchange ratio was above the limit.

The transaction with NTCT should be an accretive one for both shareholder groups, but if DHR holders can get an attractive discount in the process, it would be even better. If the limit is in effect the day of the exchange, we think there may be a more attractive option for shareholders of DHR if they wait for the next event.