EMAG: What a Wreck!


You win some, you lose some, although I’ve been losing more often than winning lately.

The EMAG merger did not go through as expected today and when I woke up this morning, the stock had already dropped 50% and 44% by the end of the day. My stake in EMAG is now down 42%. Talk about a sickening wild ride.

Here’s the press release.

Emageon Inc. (Nasdaq: EMAG), a leader in enterprise medical information technology systems for hospitals and health care networks, announced today that it has been informed by Health Systems Solutions, Inc. (OTC Bulletin Board: HSSO) that it does not expect that Stanford International Bank Ltd. (SIBL) will provide the funding necessary to consummate the parties’ merger transaction today. The merger was scheduled to close today, February 11, 2009, in accordance with the terms of the parties’ amended merger agreement. Emageon is evaluating its options in response to this development.

Although it isn’t clear whether the deal has failed, there is no other choice but to consider it failed at this point. Right now I’m sure we feel half dead at this point but hope will only lead to disaster.

Yesterday, just before I left for work I put in another order at $2.64 thinking I would make a quick 10% or so with a day remaining. All publicly available information pointed to a closure. Unfortunately, we know the result.

Mistakes

Rather than assess my position and asset allocation, I got greedy and failed to minimize risk by adding to an already full position. Basically, this was a failure in discipline.

Although I know that markets are irrational, situations like yesterday, where there was a sudden cliff-like 25% drop before making its way up again, rung some alarms but I convinced myself that I was the logical one.

Even without news, when mergers drop on huge volume, some people know things that we don’t. Ask the DISK shareholders who too have been thrashed recently. 10% drops may be a fund closing some positions but 25% is a complete unload.

I should have been happy to take my winnings. No point in trying to squeeze every last drop. Lost 42% for a 7% gain. I wrote down my odds on this blog for a reason but I didn’t refer back to it for a reality check.

What Now?

I’m not hoping. I consider the deal to be a failure and this has now become a huge setback for my 2009 portfolio. I was up 1% yesterday YTD but it now looks like I’ll be further below the market.

The important thing is to not try and “win” my money back by speculating and taking on additional risk.

I’ll be monitoring this one closely and see whether future press release clarifies the status of the merger. If the announcement is made that the deal is truly off, then my stop loss should kick in at $1.25.

Disclosure

I hold shares of EMAG at time of writing with stop loss at $1.25

  • MKL

    DISK got the $1.3M from Nyx… Anyone up for more DRAMA???

  • Sorry Jae (and others) but things like this happen. I think this deal was far riskier than it seemed. There seems to be some shady dealings and I’m not sure what is going to happen in the end. The financing cancellation and then acceptance back in December was a red flag and made me avoid it.

    It looks the story wtih Standard International bank was broken on the Internet first. We had a story from Bloomberg sayign tthe SEC launched a probe of this bank last month:

    http://www.bloomberg.com/apps/news?pid=20601109&sid=aUtjE4_bm4oM&refer=home

    Who knows if there is anything sinister happening with the bank but it’s too bad the story wasn’t broken earlier.

    I’m not sure if some other financing source is feasible but that’s an option for the buyer. However, as you indicated, it’s safe to assume that the deal has failed…

    I agree wtih you that you shouldn’t think about “winning it back.” Make the most rational decision, whatever that may be, and move on. Risk arbitrage is a STATISTICAL game. Some deals are “GURANTEED” to fail; you just need to make sure that you keep the number of successes high… anyway, I’m just a newbie but that’s my thinking…

    Sivaram Velauthapillai’s last blog post..BCE expects positive, but low, growth in 2009

  • @ MKL

    Things sure are unbelievable. I figured DISK would fail for sure but they managed to secure the deposit.

    @ Sivaram
    Yup. Need to move on and always learn. Thanks for the thoughts.

  • My position was sold at $1.25 BTW. Never felt so dirty before lol.

  • MKL

    Well, Jae, don’t forget that EMAG secured the deposit as well. I’m glad you’re out. Now you can move on to something else. I’m going to let this sit for awhile, but do something else as well. However, I am NOT doing DISK. I will keep you posted (if you’re interested) and otherwise let’s just all move on. There are a lot of opportunities out there.

  • Jim

    I’m completely done with M&A’s. They seem to be the riskiest investment there is in my experience. NET NET’s are the only thing close to a guarantee and the only thing I’ve made a substantial amount of money on.

  • MKL

    What is a NET NET?

  • Andrei

    After the EMAG disappointment yesterday, I think i’m going to be sticking to NET NETs and other less speculative investments. Has anybody looked at toy maker RC2 (Symbol :RCRC)?

  • Boy do I feel like that as well. But if a low risk merger comes along, I’ll be in it again. Be smarter about it as well this time and take my winnings before its too late.

    @ MKL
    Net Net is what Graham came up with. I wrote about it here.

  • I skated out when this stock was at $2,40 and it turns out that was a good trade. Sometimes it pays to pay attention to the character of the parties involved. Plus, my thinking is that a 20% return is good enough, after hitting that it is worth moving onto the next deal…in M&A investing that is.

    Sorry for the bad luck on this one, but don’t give up on merger arbitrage. It is a still a good way to take advantage of the current marketplace.

    Andy’s last blog post..Site Developments

  • Andrei

    About EMAG–When are the $9M supposed to be delivered to the company from the failure of the merger deal? Does anyone know?

  • @ Andy,
    I did notice your sale on covestor but in hindsight, I decided to be greedy. I should have just sold when the spread closed to 7% which was good enough..

    Always something to learn in the market and I’ll apply it to the next merger than comes along.

    @ Andrei
    The original arrangement was the day after the scheduled date but since it was delayed by a day, the money should be deposited tomorrow, the 13th.

  • MKL

    Hi Jae. So you simply look at books? I need confidence in what I guess I’d call the “vitality” of a concern. Its got two parts. The first is a useful and desirable good or service. Its either a new(ish) innovation offering an advantage, or not new but a stable need for it on the part of the buyers. The second is the determination of management to provide this good or service in a way that not only ensures the ongoing concern, but is so determined to increase or develop further to the needs of the (paying) customer. This last cannot be done without a strong company.

  • Mark S

    Despite the unfortunate series of events & painful drop in price, I am holding the shares on the belief the company is still undervalued. First, the shares are trading for less than the cash on the balance sheet now they have collected the $9 million is escrow. Secondly, if you look at the proxy statement, there were several companies bidding for EMAG as late as Sept ’08. So I think there is value here.

    This situation reminds me of another merger last year – NetManage (NETM) – the acquiror couldn’t get the financing and the deal fell through. Two months later another strategic acquiror came along and bought the company for the same price. Also, NETM had similar characteristics – lots of cash, somewhat profitably, but no scale. I held on and reaped the rewards despite the sharp declines initially. I think it happens with EMAG too.

    Any thoughts?

  • @ MKL,

    Im a bit confused about the comment. Are you talking about a company that you are interested in?

    @ Mark S
    There definitely were other bidders but to hold onto EMAG in hope of another buyer coming along is speculative for me. It sure could happen, but I sold because it’s not the type of company I want to own. I mentioned in the first post on EMAG that I would sell if things fell apart and it did, so I sold.

    Not the end result I was hoping for, but I don’t have to make it back the way I lost it.

  • Mark S

    True, you never want to create another investment thesis once the first falls apart. However, I do not want to sell at an irrational price, which i believe EMAG is trading at now. The company has no debt and approximately $1.30 / share in cash, including the $9 million escrow they collected. So, this is a net net, and you are getting the operating business for free. A larger strategic acquiror (not like HSSO) could easily take EMAG’s revenues and scale the business. Eventually that is what I think happens, especially with the activist shareholders on the board. I believe they will re-initiate the strategic review process, and solicit bidders. Like I said, I have seen it before among stocks with similar characteristics – cash heavy, but not enough scale.

  • Mark S.

    True, you never want to create another investment thesis once the first falls apart. However, I do not want to sell at an irrational price, which i believe EMAG is trading at now. The company has no debt and approximately $1.30 / share in cash, including the $9 million escrow they collected. So, this is a net net, and you are getting the operating business for free. A larger strategic acquiror (not like HSSO) could easily take EMAG’s revenues and take out a lot of costs. Eventually that is what I think happens, especially with the activist shareholders on the board. I believe they will re-initiate the strategic review process, and solicit bidders. Like I said, I have seen it before among stocks with similar characteristics – cash heavy, but not enough scale.

  • That’s a definite possibility. Will be interesting to see what happens though.

  • MKL

    Mark S. I too still have my EMAG for the same reasons. I must acknowledge though, that were the EMAG deal to have gone through and were I to have my EMAG money back right now, to invest with, the present EMAG situation is not one I would put my money into because there is no time frame. I am weighing now whether to pull it, or give it a distinct timeframe and if the board cannot generate any interest in that time frame, to pull it then. Still turning this one over in my head.

  • Andrei

    @Mark S. — I am in your same camp on this one. I also think the share price right now largely reflects an overreaction and probably downward pressure on the stock from investors dumping the shares after the arbitrage went south. I’ll also be waiting it out and hoping for another company to come in.

    Also, I think i saw that the new stimulus package has some money earmarked for MedicalIT companies like EMAG. What implications do you think something like that might have on EMAG?

  • MKL

    I don’t have much hope for the company with that. That would be only a one-time infusion and I think this management needs help running its business for what it’s worth.

  • Even if EMAG has $1.30 per share in debt, they are not a profitable company in their current state. So, that $1.30 will be whittled away quarter after quarter.

    The hope is that management will now have to do something–either find a new partner, or fix the business. I’ll need to see some plan before I jump back in.

    Wide Moat’s last blog post..Buffett the Bondsman

  • MKL

    Red Flags for Investors or EMAG: What a Wreck. Wasn’t sure where to hear some reactions to SIBL. Either way, I am amazed that EMAG got their $9m. What would EMAG’s responsibility have been on due diligence on their purchasers? What would EMAG’s responsibility have been to disclose to shareholders any knowledge of SIBL’s probe which is apparently far more in-depth than we found on the internet?

  • John

    Just noticed on Minyanville that the Sec has charged Allen Stanford, and that the FBI, among others, are investigating SIBL. Not sure if it matters at this point, but does anyone know if EMAG might have any legal footing for a lawsuit? Or perhaps a shareholder lawsuit?

  • In hindsight, we should have heeded the warnings from the bloomberg and various other articles. Let the SEC rip into them. Their investors are already withdrawing money like crazy so they should be going down soon.

  • Ken

    Fyi, finally published my arb/emag post and published it today. Thanks again JJ for the frequent updates.

    Ken’s last blog post..Risk Arbitrage & EMAG Post Mortem

  • It’s a great post. I’ll be sure to link to it this week.

  • John

    For those still in play… Emag is being bought for 1.82. It had a bid all morning so, of course, I dumped most of my remaining shares and then saw the pop just now. Anyone else sick of this stock?

  • MKL

    John, what do you mean it is being bought for $1.82? Do you mean someone else wants a merger and has offered $1.82? Or do you mean simply its popped up to $1.82 today? Thanks.

  • Andrei

    Phew! I just sold my shares of EMAG for $1.52/share..saw the jump of nearly 100% when I came back to my desk from lunch and acted quickly…I must say…I feel lucky to have gotten out today at that price–It definitely wasn’t a stock that I wanted to hold and although I sustained a loss, it wasn’t as bad as it could have been. This one surely provided a good learning experience.

  • Wow. I must say that this is one crazy turn of events. Thank goodness you got out ok.

  • John

    Emag is being bought out for $1.82 by AMICAS. A tender offer will commence by March 5, and the board has already unanimously voted in favor of the buyout. Funny how it had a bid all morning before the announcement… Seems like quite a bit of info gets leaked to certain people with this stock.

  • @ John,

    It really is strange how this stock is traded. Definitely seems to be a lot of “insider” trading. After the leak and the subsequent 50% drop on the day before the announcement on Feb 10, I don’t think I want to get involved with this merger at all.

  • MKL

    It is scary that there is, in fact, no way to know what it is we do not know. So even with all the knowns, say with PSD, as steady as it ended up resolving, there was that last day (or day before) when the stock dropped, and we were all wondering what was going on, did someone know something we didn’t know? And that one turned out ok. But there is always that – NOT being an insider..

  • Jim

    Jae and all the gang, I’d like to share a quick little story concerning EMAG with you all and explain why I still believe that it was the PERFECT investment opportunity. So much time is spent on the upside in regards to analyzing a company that many of us fail to recognize the downside risk. Myself included. Although I didn’t public state this anywhere, I did however write an email to an investor friend of mine dated Jan. 20th, 2009 in which I disclosed the downside risk to EMAG which I believed to be $1.75 per share. I know many investors who panic sold EMAG when it took a dive and had they spent as much time on the downside as they did evaluating the upside, they may have come to the $1.75 per share downside conclusion that I did or somewhere near $1.75 per share. Believe me, I wanted to sell but instead of doing that, I shut my computer down and went on vacation to Montana. Enjoying the negative 20 below weather and 4 foot of snow, I believe it freezed me to the point of reality :) 3 day after returning from my vacation, the stock is trading at $1.78 per share today. I closed my position knowing that my reasoning was correct and knowing that the $1.82 per share offer on the table currently could take longer than anticipated or fall through just as the previous deals did. My point is, anytime you can find a business with a 40% upside and an 8% downside; to me that’s the perfect investment. It is just as important to measure the risk as it is the reward and the EMAG deal is a prime example of that. I could have lost a lot more money but I stuck to my reasoning. Warren Buffet said it best “You’re neither right nor wrong because other people agree with you, You’re right because your facts are right and your reasoning is right – and that’s the only thing that makes you right. And if your facts and reasoning are right, you don’t have to worry about anybody else.”

  • Mark S.

    This obviously happened quicker than I expected, but as I stated earlier, I have seen this movie before with cash heavy, but not enough scale, businesses. Given the stock was trading at a material discount to its cash on the balance sheet, any takeover would get the operating business for relatively nothing. Plus, remember, there were multiple bidders for this company only a few months ago – they submitted real bids and not just indications of interest. While I am not necessarily happy with the $1.82 price – as I still think it is worth more – you still have to stick to reasoning sometimes.

  • Good points and it is something I did consider. As I stated in one of the posts, it wasnt a company I wanted to hold as an independent company. Should EMAG have continued to operate without any bids, although they were trading for less than cash, the rate at which they burn cash was an issue for me. Every quarter that goes by without a bid, their margin of safety drops significantly.

    This one ended up working out well in the end and quicker than what I expected as well but I wasn’t going to speculate on another buyout.

    My reasoning was sound and I put in a stop loss rather than sell into the panic.

  • MKL

    The numbers of this situation are the same for all of us. The assessments are all similar. I for one wish I had put a stop-loss myself, and not gone through the drama. I will NEVER do that again. I also did not like having to hold the terrible loss while I waited for another bidder.
    @Jim, I like very much what you had to say about evaluating the downside with as much determination as the upside. It would’ve helped me better determine the price where I allowed myself in and told me where to get OUT. While I could see the $1.80 downside, because the risk of falling to it was present, I had too much focus on the upside and stuck with my focus on the upside. To my loss. I very much appreciate your comments. They articulate for me what I was thinking but would’ve taken me much longer to condense into usable thoughts, a usable frame of mind.

  • MKL

    I have been keeping an eye on DISK. $2.75 purchase price, $1.60 right now. I am NOT IN. Have been keeping an eye on discussion groups because they are so similar to our discussions on EMAG when we were in (why no word? where’s the financing? who said what??? why the price drop? does someone (lots of people!!) know something we don’t??) and it is instructive and insightful to watch the drama now going WITHOUT being involved.

  • Im staying away from DISK for now. I’m looking for good high yielding bonds at the moment.

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