Special Situation: Going Private Transaction


Recent Merger Developments

It’s been a while since I last wrote about any special situation.

But in case you haven’t noticed, merger and acquisition activity have been steadily increasing.

Disney recently bid for Marvel, Kraft got rejected by Cadbury and the deadline for AT&T to acquire Centennial Communications is approaching.

So those are the big guns flexing some muscle and most likely to go through.

AT&T still have to get an approval from the FCC though which is one of the biggest hurdles and there is still a 7% spread with AT&T and CYCL. The deal was announced back in Nov of 2008 which also means that many people have forgotten about it while new names have cropped up in the  media. May become a buying opportunity if the spread remains even after FCC approval.

Smaller Special Situation Plays

I was involved in a going private transaction with Zabera Systems where the management of the company voluntarily opted to delist the company due to high costs in maintaining its compliance with the SEC. It’s somewhat similar to a stock tender.

ZRBA is a micro cap with a market value of $9.5m with virtually no trading volume, so it made sense for the company to delist.

What the company proposed was to reduce the number of stockholders by 1-for-250 reverse splitting the shares outstanding. Then for any shareholders that hold less than 1 share of ZRBA after the reverse split, the company would then pay out in cash $5.20 in cash per share for the number of pre-split shares held.

To put it simply, all I would have to do is buy 249 shares of ZRBA, which will become 99.6% of 1 share which entitles me to receive 249 x $5.20=$1294.80

Sadly, the company came out today saying they’ve changed their minds.

Obviously this is another form of risk arbitrage. In this case, the risk wasn’t the ability of the company to obtain financing. Go through their financial statements and you’ll see that they were capable of going through with the de-registration.

The risk is that small companies tend to change their minds more regularly.

So while the opportunity and profit of small-micro cap risk arbitrage is only viable for small investors,  there is higher uncertainty in how management will pursue their intended course of action.

Luckily I managed to sell and came out with a tiny $12.95 profit. Need to thank ZRBA for giving me a free lunch at least 😉

Kid Castle Educational Corporation (KDCE)

KDCE is another going private situation. It’s basically the same as ZRBA except it’s even smaller.

Shareholders of less than 5000 shares are entitled to receive $0.18 in cash.

KDCE is going through with their plan. They even scanned their letter of transmittal they mailed out.

A nice opportunity for a small portfolio.

Discount Broker

I just opened up an account with Tradeking and they want to charge me $55 in fees just to buy 4999 shares. Absolutely ridiculous. Tradeking is definitely not a broker you should use for stocks under $1.

Anyone know of a good cheap one that doesn’t slam you with absurd prices?

I’ve deposited $1000 of liquid cash into this account and plan to use this to try and pull the trigger on my best ideas.

Currently I manage my own 401k so it’s impossible to withdraw but I’m hoping that I can grow this $1000 to something much bigger to help pay for a down deposit on a home in a couple of years or so.

Disclosure

Trying to fill my order on KDCE. I really hope this post doesn’t pump up the price…

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