Shares of Endurance International Group Holdings (EIGI) soared in early trading on Monday after the company announced a definitive agreement to be acquired by Clearlake Capital Group for $3 billion. The all-cash deal is expected to close in the first quarter of next year. Endurance stock was up 62% as of 10:30 a.m. EST, and it's likely to hover there until the deal closes.
Overshadowed by the acquisition announcement, Endurance also released results for the third quarter of 2020. Subscribers to the company's cloud-based solutions were up almost 4% year over year, while quarterly revenue was up 3% to $278 million. This resulted in an impressive improvement to its free cash flow: up 53% from last year to $42.6 million.
Clearlake clearly likes Endurance's potential enough to buy it out: The $3 billion deal is inclusive of Endurance's debt, meaning the offer price is $9.50 per share, about where it now trades.
There are two actionable ways Endurance shareholders can respond today's news. The first option is to assume the deal will go through. The offer is viewed positively by management; the companies have already entered into a definitive merger agreement, making the outcome likely. With Endurance stock now trading within 1% of the buyout price, there's little reason to keep holding. Shareholders can sell now and redeploy that cash in other stocks.
But a deal is never final until it's final; there's a small chance it could fall through. So the other option is to hold the stock hoping that happens. This scenario assumes the long-term opportunity for Endurance as an independent company is greater than the buyout. To that end, there are encouraging signs considering the company is currently growing revenue and free cash flow. But more research should be done to assess the company's financial strength, growth prospects, and competitive advantages.