A Tumultuous Bidding War For a Mortgage REIT – The Special Situations Report Episode #65

Episode Summary

Executive Summary: Episode 65 centers on two event-driven situations: a prolonged bidding war for mortgage REIT Two Harbors, showing how definitive deals can still be repriced higher, and Five9’s $200 million accelerated buyback, which sparked a sharp rally despite the company’s history of a failed Zoom deal, activist pressure, management turnover, and disruption risk from AI.

Main Topics: Two Harbors bidding war and merger-arbitrage upside (Priority: 5/5): The hosts detailed how Two Harbors went from a definitive all-stock deal with UWM to competing bids, a superior proposal from CrossCountry Mortgage, and then a renewed higher offer from UWM, illustrating that merger-arbitrage can produce upside beyond the announced spread. Why bidding wars matter in merger arbitrage (Priority: 5/5): They argued that while most definitive deals close, a small but meaningful share receive higher offers after announcement, creating optionality that many investors overlook. Two Harbors business model and hedge profile (Priority: 4/5): Two Harbors was described as a mortgage REIT with mortgage servicing and residential mortgage-backed securities, where the two businesses naturally hedge each other across interest-rate regimes. Five9’s failed Zoom acquisition and stock decline (Priority: 5/5): The discussion revisited Five9’s 2021 failed all-stock deal with Zoom, shareholder opposition, and regulatory scrutiny, framing it as a long-running special-situation disappointment that left the stock deeply depressed. Five9’s strategic uncertainty amid AI disruption (Priority: 4/5): The hosts debated whether Five9’s decades of contact-center expertise and enterprise relationships can offset the risk that AI tools make its platform easier to commoditize or replace. Accelerated buyback as a catalyst (Priority: 5/5): Five9’s new $200 million repurchase authorization, plus an accelerated repurchase tied to a prior authorization, was presented as the immediate catalyst for a >30% stock jump and a possible sign management is acting to offset dilution and support EPS.

Key Arguments: Definitive merger agreements usually close, but higher bids still occur often enough to matter; the hosts cited their own 15-year analysis showing about 1.5% to 2% of deals receive a higher bid. In merger arbitrage, upside is not limited to closing spreads; bidding wars can materially improve returns, as seen in examples like Straight Path Communications and earlier special situations discussed by the hosts. Two Harbors is structurally interesting because mortgage servicing can benefit when rates rise and refinancing slows, offsetting weakness in its mortgage-backed securities portfolio. UWM’s original all-stock bid became less valuable when its stock fell, leaving unhedged shareholders exposed and helping open the door to competing offers. Five9 remains strategically ambiguous: AI could strengthen the company by improving operations and product capabilities, or it could disrupt the business by enabling customers to build comparable tools more cheaply. The buyback is meaningful not just because of size, but because it addresses prior dilution and could support per-share earnings if shares are actually retired rather than merely offsetting SBC. Partnerships, especially with Google Cloud and Google Enterprise, may help Five9 win customers in healthcare and retail, though such announcements alone may not be enough to change the long-term thesis.

Data Points: Definitive merger agreements closing rate: 95% - Stat that one investor cited from the hosts’ discussion of merger arbitrage books/data Deals receiving a higher bid: 1.5% to 2% - Hosts’ quantitative estimate from roughly 15 years of deal data Two Harbors original offer: Almost $12/share - UWM’s initial all-stock acquisition proposal for Two Harbors Two Harbors original deal value: $1.3 billion - Size of the initial UWM transaction UWM stock impact on deal value: About $8/share at one point - Because the consideration was all-stock and UWM shares fell after announcement Competing bids for Two Harbors: $10.70/share and $10.75/share - Higher offers that emerged after the initial UWM bid CrossCountry Mortgage bid: $10.80/share cash - Superior proposal that also agreed to cover UWM’s termination fee Termination fee: $25 million - Fee CrossCountry Mortgage agreed to pay on UWM’s behalf Amended CrossCountry bid: $11.50/share - Later increase after the superior proposal was accepted Renewed UWM offer: $12/share - UWM’s later direct-to-shareholder proposal with no proration Two Harbors market price: $12.54/share - Current trading level mentioned by the hosts after the latest bid Implied spread: Negative spread of almost 10% - Used to indicate the market expects another higher offer in the bidding war Five9 market cap: $1.7 billion - Approximate value after a prolonged stock decline Original Zoom-Five9 deal value: $14.7 billion - Value of the failed 2021 acquisition by Zoom Five9 stock decline since failed deal: Over 85% - Illustrates the magnitude of the post-deal failure decline Zoom stock decline since failed deal: About 70% - Context for why the all-stock deal was controversial Five9 buyback announcement: $200 million - New repurchase authorization announced during the episode Buyback as % of market cap: Roughly 15% - Hosts’ estimate of the buyback size relative to market value Five9 stock reaction: Over 30% in a single day - Immediate market response to the buyback news Prior repurchase authorization: $150 million - Buyback authorization announced in November 2025 as described in the transcript Accelerated repurchase amount: $90 million - Used to finish the prior $150 million authorization quickly Another accelerated repurchase amount: $50 million - Earlier accelerated repurchase tied to the prior authorization Shares outstanding change: Up 25% over 4 years, down about 3% in the last year - Used to frame dilution and recent buyback effectiveness Five9 forward P/E (true GARP basis): 24.94 - Hosts corrected an initial misread of the valuation Five9 trailing/forward P/E confusion: ~34 trailing and 6 forward (non-GAAP confusion) - Illustrated the difference between adjusted and actual profitability metrics

Pivotal Quotes: "95% of all definitive merger agreements, mergers that have definitive merger agreements end up closing." — Asif Surya (referencing another investor/book discussion): Used to emphasize how rare, but real, deal breakups and reratings are in merger arbitrage "the board of Two Harbors decided that this offer from cross-section mortgage is going to be a superior proposal" — Damanha/Asif Surya: Marks the moment the competing bid displaced the original UWM agreement "this buyback announcement caused the company's stock price to soar over 30% in a single day" — Damanha Surya: Highlights the immediate catalytic effect of Five9’s repurchase news

Implications: Listeners should take away that event-driven investing has upside beyond deal spreads: bidding wars can create surprise gains, while buybacks can re-rate beaten-down names. Five9 remains a live debate between AI-led opportunity and disruption risk.