Special Situation: Going Private Transaction

September 11, 2009 | Comments (25)

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…

  • http://widemoatinvesting.com Wide Moat

    TD Ameritrade charges the flat $9.99 for orders of any size. I often use them for stocks trading under $1.
    .-= Wide Moat´s last blog ..Review: ‘Why Are We So Clueless about the Stock Market?’ =-.

  • http://www.oldschoolvalue.com Jae Jun

    Thank Wide Moat. Will see if I should switch.

    A lot of speculation in the stock as well. Up 20% without any real news.. wow

  • http://valueinvestortoday.com Jim

    Jae, concerning the discount broker. I use Banc of America Investments. If you have over $25,000 in qualifying accounts (i.e. CD’s, Checking, Savings), your trades are free. In addition, Bank of America now owns Merill Lynch and they will have many additional tools available soon when they finish incorporating that business into the new brokerage service.
    .-= Jim´s last blog ..Axcelis Tech. Update =-.

  • psp627

    Jae-
    I was in ZRBA too. I got out at $4.60- Though it may go much higher if a buyout comes through, I didn’t feel comfortable staying in as to me it would be speculation. I got in only for the arbitrage opportunity and when that fell through, I got out.
    It seems like these small cap special situations have a high % of probability and the spreads can be very profitable. I’m curious to know what takeaways (if any) you have from the termination of the ZRBA situation. Will you alter your approach in the future?

  • http://www.oldschoolvalue.com Jae Jun

    @psp627

    With mergers or arbitrage, I enter the game at the last phase just a month or so before the deadline. This lets me see how the deal has progressed and what the outcome will likely be.

    In ZRBA case, I saw the financial statements and concluded that they could easily finance the transaction which is why I bought at the early part because small caps tend to jump to the trading price much quicker than the big mergers.

    So my original thesis and catalyst was for the tender only. The news yesterday didn’t specify what the other alternative strategies to increase shareholder value was. The filing just read like any other standard press release for companies that failed to go ahead with their plan.

    The one difference was that the price shot up 20% while 99% of the time it would have dropped 20%.

    So although I missed out, I still feel lucky to have not realized a loss.
    So my takeaway is that if I hold after the news on the next failed special situation, I’ll probably be down 20%.

    Need to stick to discipline with special situations and take emotions out completely.

  • http://www.chromainvesting.com Ra’uf

    Think or swim has a choice of flat rate trading of $9.95 for up to 5000 shares. I use it for trading penny stocks, in a small Roth that I have. It doesn’t have any IRA fees like a lot of the other discount brokers. But the interface is clunky. I use Tradeking too, much better interface and good customer service, but to expensive for Penny stocks.

    Ra’uf
    .-= Ra’uf´s last blog ..Zecco Cheap online brokerage with IRA Fees =-.

  • http://www.stockpursuit.com Mark

    the buy volume was huge on ZRBA in morning. I got out late at 4.66. still happy with this though. It took the news well but I think it could sell off big tomorrow.
    .-= Mark´s last blog ..Trendline Charts =-.

  • Ryan B

    Jae Jun,

    Where have you been getting your ideas on these small cap arbitrage opportunities?

    Did you get your order filled on KDCE, not much volume on that particular company.

  • http://www.oldschoolvalue.com Jae Jun

    @ Mark,

    Any more interesting reverse splits you know of?

    @ Ryan B,
    I found out about ZRBA from Mark, just above you, and other fellow investors I have built rapport with on the internet.

    The best way though is to search for new SC TO-I & SC 13E3 forms from the SEC website.
    http://sec.gov/cgi-bin/srch-edgar?text=FORM-TYPE%3D13E3&first=2009&last=2009

  • Fredro

    Hi Jae,

    Is there a date you have to have the shares settled by for the KDCE case?
    What would happen when they do buy back the shares for those who own less than 5k? Does my broker automatically take care of everything and the cash appears on my balance or is there necessary paperwork (like the form you posted)?

  • http://www.oldschoolvalue.com Jae Jun

    Hi Fredo,

    I don’t think they announced the effective closing date for KDCE.

    If you own less than 5000 shares, such as 4999, and hold until the closing date, your broker will automatically convert the shares to cash. You don’t need to sell it. And because KDCE shares are so tiny, save the brokerage costs and just let them do the work.

    No paperwork needed.

    FYI, I couldn’t get my order filled so I’m out of this one. It’s gone up too much for me to consider after I add buying fees.

  • Shane

    Jae Jun

    Well there was one opportunity last friday through Monday that is now gone but FELI was offering a reverse split of 1 for 7500 shares and cash buy out at 0.35 when it was selling at 0.21. Today that jumped to 0.60 a share. I was able to act quickly and make a nice profit. I have to say great thanks to Jae Jun as this post led me to a huge return for my very small portfolio. I am really new to investing and would have never knew how to have found this opportunity. Big thanks!!!

  • http://www.oldschoolvalue.com Jae Jun

    @ Shane,

    Wow that was a huge return in a few days. Good job!
    I saw FELI as well a couple of days ago but was missed out… I checked up to read the filings today and doh.. up over 150%

    Glad you now have a new strategy under your belt.

  • Shane

    Great new strategy… thanks

  • http://valueinvestortoday.com Jim

    @Jae & Shane,

    I wrote a dissertation concerning FELI on my blog as well as Greenbackd.com’s blog.
    .-= Jim´s last blog ..Special Situation: FELI =-.

  • http://www.oldschoolvalue.com Jae Jun

    @ Shane,
    I’ll have a new post on how to find special situations properly. It goes into more detail which I’m sure you will find useful. Was going to post it tonight but left the file on my other computer which I don’t have access to tonight.

    @ Jim,
    I found FELI on Sep 13 as well but then spent the next couple of days staying up til the morning working on the spreadsheet. Didn’t have any time to read blogs this week.

  • Fredro

    Thanks Jae.
    By the way I used zecco and it is just one commission charge. I don’t recommend Zecco as your main account, that’s why I also have Scottrade. Zecco is just my “fun” account.

    FELI is at 0.55 ask price now, so anyone holding under 7500 better sell quick.

    Regards

  • http://www.stockpursuit.com Mark

    Jae, don’t go with TD Ameritrade. Zecco is just $4.50 a trade. That’s half of TD’s. I’ve had a Zecco acct for atleast a year and haven’t had any problems with them. they have a flat rate for all stocks. I have even traded sub penny’s(like .0001-.009) with them for 4.50 a trade. I never knew how much I was getting screwed until i opened the tradeking and then the Zecco. Interactive Brokers is one of the best overall but i don’t know how they are on penny stocks.
    .-= Mark´s last blog ..Financials Still Strong =-.

  • http://www.stockpursuit.com Mark

    “@ Mark
    Any more interesting reverse splits you know of?”

    No, not right now. I actually hadn’t been looking at plays like that lately. I just happened to see Mike Goode post on ZRBA on his blog reapertrades.com. He rarely mentions plays like that though. thanks for the info about the tweaking the SEC search.

    This other guy told me awhile back that there seems to be this phenomenon with companies that go private or move to the pinksheets. After the stock delists off the nasdaq or Amex or whatever and moves to the Pinks they often will bounce back real hard and run for awhile right after they start trading on the Pinks. I guess all the people dumping the shares as soon as they find out it will delist shakes out enough people any demand pushes it up…not sure
    .-= Mark´s last blog ..Financials Still Strong =-.

  • http://compoundinglife.com Ken

    I use etrade, sharebuilder and zecco.

    zecco: Originally signed up for an account because they offered 10 free trades a month as long as you had $2500, they have since upped that to $25,000. But their trades are only $4.50. I have not used this account very much so I don’t know if they charge you more for thinly traded issues.

    Sharebuilder: They offer a $50 credit if you find the right coupon code and a certain number of free scheduled investments then $4 after that. Scheduled investments happen on the market open on Tuesday and have to be scheduled by 5pm EST the Monday before. They charge $9.99 for real time trades. I use this account for weekly scheduled investments but only for what Lynch calls “stalwarts”. Scheduled investments are obviously not good for special situations where prices can be more volatile. Sharebuilder also does not deal with OTC, PK, or other thinly traded stocks.

    Etrade: This is my primary brokerage account. Etrade is not the cheapest but if you make more than 30 trades per quarter or have more than $50,000 in the sum of your accounts they only charge $9.99. I have bought most of my thinly traded issues (OTC, PK, preferreds) through etrade and they have never charged me more than the standard commission.
    I also utilize Etrade’s RSA token offering which requires me to provide a randomly generated pin from my RSA token in addition to my username and password. Since the majority of my investments are in this account I like to have a little extra security in accessing this account.

    I have also called Etrade on a couple of instances for support or questions and have gotten quick responses.
    .-= Ken´s last blog ..Buffett: Don’t hate the player, hate the game =-.

  • http://www.oldschoolvalue.com Jae Jun

    I would prefer to stay under the $5 per trade range. I’ve been spending $10.95 with my 401k fidelity and now that I’ve got a real money account, I don’t want it hit with fees.

    Not a fan of Zecco.. heard too many bad things about them…

    Anyone use SogoTrade? My friend uses it and was able to buy about 70,000 $0.001 shares and paid only $7 even after the additional fees.

  • http://twitter.com/3dcheckers 3dcheckers

    Anyone still following KDCE? Big price drop did the deal fall apart?
    .-= 3dcheckers´s last blog ..3dcheckers: Copy of margin of saftey coming my way. =-.

  • http://www.oldschoolvalue.com Jae Jun

    No I haven’t checked out KDCE for a while.
    I wonder why it still hasn’t gone through. Doesn’t look promising..

  • Cavalatica

    Hey Jae,

    You might want to check out Interactive Brokers. They charge a fee of half a penny per share, with min of $1 a trade. That means 2000 shares represents the same as Ameritrade’s $10 commission. I use IBKR for any trades of less than 2k shares, and Ameritrade for any over 2k shares.

    Unfortunately, they require a min of $10 in fees per month, but if you execute more than 1 trade per month then by itself its worth it (compared with Ameritrade).

    Keep up the good work and merry Xmas.

    - Marcos

  • Teddy

    Hi Jae, sorry for commenting on 2 years old post but I’m really interested to know about the discount broker search result. What discount broker are you end up using?

    Thank you

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