It's Mongo-Merger-Monday in the slot machine industry, as news that International Gaming Technology (IGT) will be acquiring Anchor Gaming has started everybody's week off with enough noise to fill a boardwalk's worth of casinos. IGT's dominant positioning will certainly be cemented by the merger, and it looks like a win-win situation for everyone involved.
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It has been an exciting early summer in the casino gaming industry. Beyond Nevada going forward with attempting to fully legalize and regulate Internet gambling in the state, we have seen the clutch being popped in the shift to coin-free machines. And now we have a mega-merger in the industry to digest. Late last night, slot machine behemoth International Gaming Technology (NYSE: IGT) -- IGT for short -- said it plans to buy Anchor Gaming (Nasdaq: SLOT) in an all-stock deal. The merger agreement is fairly simple to calculate, IGT offering one of its shares for each of Anchor Gaming's stubs. There are also some collars on the merger agreement that seem to protect both companies. If IGT's share price averages below $50 in the last few weeks before Anchor stockholders vote on the deal, Anchor has the right to seek a higher exchange ratio or cancel the deal. Likewise, if IGT's stock rises and averages above $75 in the same period, IGT can lower the exchange ratio so Anchor shareholders get stock valued at no more than $75. Basically, if the merger goes through, Anchor shareholders will get no less than $50 and no more than $75 worth of IGT stock. The merger is not expected to close until the first calendar quarter of 2002. The reason for the delay is because the merger will have to be approved not only by anti-trust regulators, but by numerous state gaming regulatory agencies. Rumors of a merger between the two companies have swirled for years. Anchor and IGT have been working together for about five years, Anchor providing the creative design and patents for slot machines with a secondary bonus -- hitting a certain combination on the slot's reels enables winners to try for additional prizes -- and IGT handling manufacturing and distribution. Together, the two created Wheel of Fortune, one of the slot industry's most popular games ever. Beyond bringing the two companies' joint venture under one roof, IGT will also acquire Anchor's patent portfolio, including the patents Anchor owns for coin-free slot machines. Anchor had been the lead licensing company for a group of coin-free technologies owned by Anchor, IGT, and casino company MGM Mirage (NYSE: MGG). With the industry's recent moves to kick into gear an upgrade cycle to these coin-free machines, Anchor's patents were probably the most attractive portion of the company for IGT. There has been little word as to what IGT will do with Anchor's lottery business line, slot machine servicing routes, and handful of small casinos, but chances are these business lines will be divested in one way or another since they are not very complementary with IGT's core business of slot machines. The merger will greatly reduce the number of companies in the slot machine industry, basically leaving only IGT and Foolish 8 company WMS Industries (NYSE: WMS) as the primary domestic manufacturers of slots. IGT's dominant positioning will certainly be cemented by the merger, and it will be immediately accretive to the company's earnings. It looks like a win-win situation for everyone involved. Paul Larson used to work in a casino in his younger days. Really. You can see Paul's stock holdings online. The Motley Fool is investors writing for investors.
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