SoundHound AI (NASDAQ:SOUN) closed Friday's trading session at $6.16, marking a 1.8% decline over the week. The stock now trades 12% below the $7 lower collar established in its ongoing acquisition of LivePerson (NASDAQ:LPSN). This price action effectively limits the number of shares that can be issued at the base level of the deal.
The merger agreement includes a collar mechanism that uses a 10-day volume-weighted average price (VWAP) prior to closing. If this average remains below $7, the deal formula continues to use the $7 floor, setting the upper limit for the base share count at approximately 43.43 million shares. Any further decline in SoundHound's stock price would reduce the market value for recipients rather than increase dilution from the merger.
According to SEC pro forma filings, at the $12 upper collar, the base share count would be 25.33 million shares. The pricing scenario table illustrates the math: at the $12 cap, the block value is $304 million; at the $7 floor, it is also $304 million. However, based on Friday's closing price of $6.16, the block in the floor case has an approximate value of $267.5 million, which is $36.5 million less than the $304 million pool suggested by the filing.
The floor scenario represents 10.0% of SoundHound's outstanding common shares as of May 7, while the cap scenario stands at 5.9%. Trading volume on Friday totaled 32.1 million shares, surpassing the 65-day average.
Deal risk decreased on Friday after SoundHound announced that Bulgaria issued the last required foreign investment approval on July 20. With this, all foreign regulatory approval conditions have been met. Approval from LivePerson shareholders is still pending, with the shareholder meeting scheduled for August 20.
LivePerson ended the week at $1.53, falling 8.9%. Shares are now 54% below the $3.33 announcement price mentioned on Thursday. The reduced price highlights three key factors: SoundHound's closing VWAP, LivePerson's cash adjustments, and the upcoming vote.
A letter issued Thursday and signed by Chief Executive John Sabino stated that shareholders could become part of a firm with "a strong balance sheet and no debt." SoundHound is able to swap secured-note shares for cash. As of March 31, it reported having $216 million in cash and no outstanding debt, facing a clear choice between maintaining liquidity and experiencing dilution.
SoundHound is set to announce its second-quarter financial results after the market closes on August 5. Revenue for the first quarter increased by 52% to $44.2 million. Investors are expected to focus on cash levels, costs related to acquisitions, and underlying organic growth.
Significant risks persist. The merger continues to require approval from LivePerson shareholders. The ultimate consideration may be affected by cash elections and balance sheet changes. Possible increases in integration expenses, customer attrition, or higher cash outflows could negate the dilution cap. For SoundHound investors, $7 does not represent a valuation floor. Instead, it marks the point at which base merger dilution ceases to increase.
