This morning, New York-based Annaly Mortgage (NYSE:NLY) announced an agreement to acquire the Fixed Income Discount Advisory Company (FIDAC) for as much as $90 million in stock, pending approval by Annaly shareholders.
The deal calls for payments of $40.5 million to be paid to FIDAC's current shareholders upon closing, with approximately $50 million payable should FIDAC meet certain revenue and earnings targets over the next three years.
For its part, Annaly expects that the acquisition will increase its pre-tax profit nearly immediately. Given the company's status as a real estate investment trust (REIT), this is a point that is highly interesting to its investors. REITs must pay out the majority of their taxable earnings each quarter to shareholders, so the correlation between higher earnings and higher dividend payouts is nearly 1. FIDAC will become a taxable component within the overall REIT structure, and given the small size of the transaction relative to Annaly's assets and income, the company's REIT status will not come under threat.
The Motley Fool's resident high-yield expert Mathew Emmert likened this deal to Friedman, Billings, Ramsey's (NYSE:FBR) extremely successful transaction with its own mortgage REIT component this past year, when it saw the potential for operating improvements by bringing a related entity in-house.
This transaction is interesting for a few reasons. FIDAC predates Annaly in its current form, and its participation was crucial in helping Annaly get off the ground. FIDAC has been listed ever since as a "sister company," and both companies have several principals in common, including CEO Michael Farrell, CFO Kathryn Fagan, and Chief Investment Officer Wellington Denahan.
In many cases, such an arrangement should set alarms off with minority investors, as companies have plenty of opportunity to railroad investors with a deal that rewards the insiders essentially for conducting a transaction in negotiation with themselves. We've seen this in a number of instances -- in this past year, principals at FTD.com extended themselves substantial success bonuses for completing a merger with FTD (NASDAQ:FTDI), already the majority shareholder and parent company. There's not much minority investors could do in such situations except sell in disgust.
Annaly addressed the potential for self-dealing a little differently, naming a group of non-executive board members to negotiate on behalf of Annaly while the executives with ties at FIDAC remained on the other side of the table. The costs of the transaction are being borne by FIDAC, and even though the purchase is small enough not to require it, final approval of the deal will be put to all Annaly shareholders. Management has pledged to vote the same way as the minority shareholders. If they reject the transaction, management will not carry the day by voting its big bloc of shares in the affirmative. Finally, the deal is heavily weighted toward performance, so if FIDAC fails to do so, the impact on shareholders is lessened.
The transaction will give Annaly the ability to broaden its distribution reach. FIDAC has about $13 billion in assets under management and has a global reach whereas Annaly's is more domestic in scope.
Bill Mann owns shares in Annaly Mortgage.
