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Mergers and Acquisitions Arbitrage Activity

April 7th, 2009 by Jae Jun

The merger arbitrage activity has been slow of late and it is no surprise. I mentioned in January that I expected mergers and acquisitions to slow down as financing became difficult to acquire.

In particular, merger arbitrage opportunities have been scarce ever since the failed EMAG deal with Stanford (my theory anyways) and the spread for other mergers have not been wide enough to offer any real decent returns.

I invest in mergers when it is close to finalized in order to reduce as much risk as possible. Step 5 is usually a good time to invest in a merger if the spread is still decent on an absolute basis after considering fees.

I do not invest after a merger announcement as there are too many variables to consider.

  1. Due diligence by both parties
  2. Financing and regulator approval
  3. Get preliminary shareholder sentiment (or controlling shareholder approval)
  4. Obtain regulator (SEC, FCC, any and all) approval
  5. Get final shareholder approval at a meeting called for that purpose
  6. Insiders continually vesting or buying shares

Pending Merger Acquisition Arbitrage List

Looking at this list, there isn’t much to take advantage of. Disk has far too much risk involved and the company fundamentals are terrible for it to be a standalone company.

Fat Pitch Financials recently tweeted about an initiation of ENPT which does seem to be the best merger at the moment.

As always you can find the latest pending details at MergerInvesting

Symbol Announced Date Closing Value Last Price Closing Date Profit Annualized Profit
DISK 11/20/2008 $2.75 $1.58 4/6/2009 74.05% 0.00%
ACBA 9/10/2008 $5.14 $6.04 4/30/2009 -14.97% -237.58%
FRBK 11/10/2008 $7.12 $7.60 4/30/2009 -6.26% -99.31%
NTMD 1/27/2009 $0.80 $0.75 4/30/2009 6.67% 105.80%
BFBC 11/10/2008 $9.21 $9.68 4/30/2009 -4.86% -77.07%
CVTX 3/12/2009 $20.00 $19.94 4/30/2009 0.30% 4.78%
EQ 10/27/2008 $37.94 $37.38 6/30/2009 1.49% 6.46%
CYCL 11/7/2008 $8.50 $8.32 6/30/2009 2.16% 9.40%
ZICA 2/26/2009 $0.81 $0.77 6/30/2009 4.68% 20.32%
ABNJ 12/15/2008 $7.83 $9.50 6/30/2009 -17.57% -76.35%
PBKS 12/19/2008 $8.07 $7.52 6/30/2009 7.29% 31.67%
AANB 1/2/2009 $2.38 $2.25 6/30/2009 5.87% 25.53%
SWIM 1/8/2009 $8.89 $8.75 6/30/2009 1.58% 6.86%
AVNX 1/27/2009 $28.97 $2.14 6/30/2009 1253.96% 5448.77%
NCX 2/23/2009 $6.00 $5.83 6/30/2009 2.92% 12.67%
GVHR 3/5/2009 $4.00 $4.01 6/30/2009 -0.25% -1.08%
ENPT 3/11/2009 $2.50 $2.05 6/30/2009 21.95% 95.38%
LIMC 4/3/2009 $2.48 $2.25 8/15/2009 10.44% 29.32%
MXGL 3/2/2009 $16.77 $16.48 9/30/2009 1.78% 3.69%
MV 4/1/2009 $25.72 $25.04 9/30/2009 2.71% 5.61%
WYE 1/26/2009 $46.35 $42.48 10/31/2009 9.10% 16.05%
TKTM 2/10/2009 $3.88 $3.81 11/15/2009 1.71% 2.81%
SGP 3/9/2009 $25.63 $23.20 12/31/2009 10.49% 14.28%
FCVA 4/3/2009 $9.25 $8.00 12/31/2009 15.62% 21.27%

Disclosure

No positions held at time of writing

Posted in Featured, Special_Situation | 19 Comments »

EMAG: What a Wreck!

February 11th, 2009 by Jae Jun

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

Posted in Featured, Special_Situation | 40 Comments »

EMAG Deal: Is SIBL another Madoff?

February 10th, 2009 by Jae Jun

For anyone involved in the EMAG merger, this article may be of interest. As a reader commented before, it brings forth the idea that SIBL is “too” consistent and we know far too little to be sure. Another “potential” Madoff.

Although the article is an opinion piece, it is interesting as well as the link to a PDF report on SIBL.

The EMAG deal is expected to close tomorrow.

Posted in Special_Situation | 26 Comments »

Pending Mergers and Spreads – Feb 05

February 5th, 2009 by Jae Jun

Reader requested list update.

Symbol Announced Date Closing Value Last Price Closing Date Profit Annualized Profit
ZICA 2008-08-14 $0.40 $0.41 Unknown -2.44 % 0.00 %
DNA 2008-07-21 $86.50 $81.88 Unknown 5.64 % 0.00 %
FONR 2008-11-14 $5.00 $0.84 Unknown 495.24 % 0.00 %
NRG 2008-10-19 $26.43 $24.56 Unknown 7.61 % 0.00 %
MVG 2008-12-02 $4.54 $6.05 Unknown -24.96 % 0.00 %
TLGD 2008-11-18 $5.50 $5.77 Unknown -4.68 % 0.00 %
COWN 2008-12-08 $7.00 $6.29 Unknown 11.29 % 0.00 %
TRA 2009-01-15 $22.13 $23.03 Unknown -3.92 % 0.00 %
FOR 2009-01-22 $15.00 $10.55 Unknown 42.18 % 0.00 %
HLND 2009-01-15 $9.50 $9.00 Unknown 5.56 % 0.00 %
HPGP 2009-01-15 $3.20 $2.83 Unknown 13.07 % 0.00 %
CVTX 2009-01-27 $16.00 $15.60 Unknown 2.56 % 0.00 %
APAC 2009-02-02 $1.61 $1.51 Unknown 6.62 % 0.00 %
ROH 2008-07-10 $78.00 $54.81 2009-01-31 42.31 % 0.00 %
CPHL 2008-08-05 $14.20 $13.48 2009-02-05 5.34 % 0.00 %
PSD 2007-10-26 $30.00 $29.85 2009-02-06 0.50 % 183.42 %
EMAG 2008-10-13 $2.85 $2.55 2009-02-11 11.76 % 715.69 %
BUF 2008-12-22 $0.12 $0.12 2009-03-03 0.00 % 0.00 %
ACBA 2008-09-10 $6.94 $7.60 2009-03-31 -8.67 % -58.58 %
ZIGO 2008-10-16 $6.56 $5.92 2009-03-31 10.80 % 73.00 %
FRBK 2008-11-10 $7.65 $7.30 2009-03-31 4.84 % 32.74 %
DISK 2008-11-20 $2.75 $0.86 2009-03-31 219.77 % 1485.47 %
WVCM 2008-12-02 $11.19 $10.78 2009-03-31 3.80 % 25.71 %
ANL 2008-12-10 $14.20 $13.98 2009-03-31 1.57 % 10.64 %
SCOP 2008-12-23 $5.62 $5.47 2009-03-31 2.74 % 18.54 %
IDEV 2009-01-05 $4.50 $5.35 2009-03-31 -15.89 % -107.39 %
EYE 2009-01-12 $22.00 $21.85 2009-03-31 0.69 % 4.64 %
ALDN 2009-01-12 $11.50 $11.02 2009-03-31 4.36 % 29.44 %
TARG 2009-01-13 $2.00 $2.50 2009-03-31 -20.00 % -135.19 %
BFBC 2008-11-10 $10.97 $10.98 2009-03-31 -0.05 % -0.37 %
WSTF 2009-01-29 $1.25 $1.11 2009-03-31 12.61 % 85.25 %
PDGI 2009-02-03 $5.00 $4.79 2009-03-31 4.38 % 29.63 %
NTMD 2009-01-27 $0.80 $0.75 2009-04-30 6.67 % 28.97 %
IWOV 2009-01-22 $16.20 $15.90 2009-06-22 1.89 % 5.03 %
EQ 2008-10-27 $37.15 $35.69 2009-06-30 4.10 % 10.33 %
CYCL 2008-11-07 $8.50 $8.22 2009-06-30 3.41 % 8.57 %
ABNJ 2008-12-15 $9.02 $10.08 2009-06-30 -10.47 % -26.36 %
PBKS 2008-12-19 $6.68 $6.41 2009-06-30 4.29 % 10.79 %
AANB 2009-01-02 $2.50 $2.28 2009-06-30 9.57 % 24.09 %
SWIM 2009-01-08 $8.41 $8.15 2009-06-30 3.20 % 8.05 %
AVNX 2009-01-27 $2.01 $1.80 2009-06-30 11.53 % 29.03 %
WYE 2009-01-26 $47.30 $43.07 2009-10-31 9.83 % 13.38 %

The list of pending mergers can be found at Merger Investing.

Posted in Special_Situation | 9 Comments »

Odds Update for EMAG Arbitrage

February 5th, 2009 by Jae Jun

There has been a real good discussion over at the original EMAG post and with just 1 week remaining until Feb 11, there has been no news (good or bad) from any party. The spread when I wrote the first post was at 47% with a price of $1.94.

After the initial post, I couldn’t find additional information on SIBL, HSSO and EMAG to counter my reasonings so I bought at $1.94 on Jan 27. On Feb 3, I liquidated by PSD position in order to take another bite at $2.40.

As you can see below, I’ve upped the probability of success to 80%. Why? If you look at slide 10 in the presentation (image below), HSSO’s future depends on acquiring EMAG.

hssemag

EMAG will become the “platform” for further growth and strategic acquisitions. With SIBL holding a majority stake, my assumption is they are also backing HSSO. An event like last December shouldn’t occur again.

Odds of the Merger

Current Price: $2.47

Upside Potential: 15% / $2.85

Downside Potential: 50% / $1.23

Probability of Success: conservative: >60% | realistic: > 80%

Probability of Failure: conservative: < 40% | realistic: < 20%

Time Frame: min: 3 weeks | max: 11 weeks (3 months) until March 31,2009. min: 7 days | max: until March 31, 2009 (highly unlikely at this point)

Disclosure

I hold EMAG at the time of writing.

[tags]special situation,EMAG,HSS,SIBL,merger,arbitrage[/tags]

Tags: emag
Posted in Featured, Special_Situation | 4 Comments »

No Sale for ValueVision

January 27th, 2009 by Jae Jun

Disappointingly, ValueVision (VVTV) announced today that they were unable to find any bidders for the company. Along with an expected bad Q4, the news caused the stock to end 44% down for the day but was at one point down over 50%.

With no sale in process, does this change my original thesis and catalyst? I’ll go through my thoughts later.

First I’ll provide some notes regarding the conference call and the press release.

The Failed Strategic Process

To sum up the strategic process that VVTV started in September 2008, they initiated contact with 137 companies, made confidential agreements with 39 companies and received preliminary interest by 13 companies. Of the 13, 4 were then invited to the next round, but ultimately, no party made a bid for the company after viewing VVTV’s operating history and debt to carriage companies.

Points from the Conference Call and Press Release

  • Wont be giving out special dividend because under “Minnesota law”, the company can not make distributions where the board considers it to affect the solvency of the company
  • Strategic alternative remains open
  • GE preferred is being renegotiated and they are confident that they can get good terms to the deal and delay it further
  • Cost structure will go down along with new cable negotiations, reduction in workforce and marketing expenses
  • Expect cost structure to be down double (~10%) digits in the next year with cable distribution savings
  • Want to get to HSN’s level of 8-10% percent of revenue for cost. Currently averaging high teens and low 20’s.
  • Cable companies don’t want VVTV to disappear as VVTV is a good paying customer. Cable companies are willing to negotiate as well as. They maintain their good channel placements next to competitors.
  • Internet sales make up 32% of revenues for full year results
  • The business has changed from 10 years ago and it is no longer just about footprint. They have to get the productivity from households and productivity per minute.

Points from the Q&A

This is where the conference call gets interesting as analysts start grilling management and frankly I wasn’t too pleased about their responses either.

  • The company even looked at a liquidation and determined that with the debt and the $185m it owes to the cable companies, shareholders will end up with nothing in a liquidation.
  • Q: If the board doesn’t approve a special dividend, will they commit to a stock buyback? A:The board will consider it but there was no enthusiasm or guarantee.
  • Q: What is your opinion of the stock price. Is it shockingly undervalued? A: “Oh, unbelievable. Yes, it’s incredibly undervalued.”
  • Q: If another company offered $1 in cash with no financing needed, would you accept the offer? A: That decision would consider the option. (Again not too convincing)

Personal Take from the News

The main story that the management kept putting forth was of their newly renegotiated carriage costs. As one analyst pointed out, “the problems were there before the market turned”. Although there were some good news, the bad far outweighed the good.

This now changes VVTV from a special situation category to a turnaround bet. It has gone from a short term position in my portfolio to a med-long term position.

It has left me thinking about my original investment thesis (1st post and 2nd post) as well as the risks I outlined. Did I make a mistake and should I sell? From what I have detailed in my writings, the current answer is no as I knew of the risks and what could happen.

I can feel the emotional side of my brain telling me to just sell and close it off, but my objective side is telling me to hold and wait it out. Rather than sell on the day of the bad news, I am taking more time to try and understand different scenarios which is why I am willing to make it a long term hold.

The one thing I did completely ignore was that as a business, ValueVision is currently terrible. If I knew this by looking at the operations of the business and its industry, obviously the potential buyers would have seen it as well.

Am I disappointed? Yes. Am I upset? No. The minute I get upset is when I know I have to sell. But the real important question I need to constantly ask is whether I am just being stubborn and do YOU think so?

Disclosure

I hold VVTV at the time of writing.

Tags: vvtv
Posted in Featured, Special_Situation | 7 Comments »

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