How to invest

Silly me. First of all, sorry to disappoint those who were interested in what was supposed to be my first tender. I was too worked up about the odds and closing date of the tender that I completely glossed over the finer details. I didn’t purchase anything today and thankfully, it was a “free” lesson.

As a newbie to the whole tender process, here’s what happened and what I imagined would happen.

What I Imagined Would Happen

As I was trying to find info on tender offers, I came across a press release for Williams Industries (WMSI), “Williams Industries, Inc. Announces Extension of Odd-Lot Tender”.

“Aug 13, 2008 – Williams Industries, Inc. today announced the Company is extending its current odd-lot tender offer to October 13, 2008. The tender, which has been distributed to shareholders of 100 or less shares of the company’s stock, offers $2.75 per share. The tender was originally scheduled to end on August 18. The extension of the tender was authorized so that those shareholders wishing to participate would have the time necessary to complete required paperwork.”

Odds look tremendous. Buy 99 shares at the current price of $1.56 for $154.44 and tender the shares at $2.75 for a total of $272.25 which results in a gain of $117.81 before fees. After fees, it would have come out to a gain of $68.86 off an initial $154.44 investment which is a handsome gain of 44% within what would have been a couple of weeks.

You might be laughing at a gain of $70, but would you laugh when if somebody buys you a $70 dinner or gave you $70 in gas money?

The Reality

After my initial excitement and sleeping on it, I went to the SEC page and looked up the tender offer document. Things looked really good. The company has a good history of buying back shares and planned to repurchase about 26,000 shares for a total of $71,000. The extension of the tender signaled to me that the company was dead serious about buying back its shares and lowering the shareholder count.

Looking at the other filings, I believe the company wants to go private.

But all good things come to an end. It ended when I read the following line:

“The Company is offering to purchase for cash (the “Offer”) all shares of the Company’s common stock, $0.10 par value per share (the “Shares” or “Common Stock”), held by stockholders that owned 100 shares or fewer as of the close of business on May 7, 2008 (the “Record Date”) and that continue to own such Shares through the expiration date for the Offer”

Stockholders not on record as of May 7, 2008 are not eligible to tender their shares and the extension is merely to accommodate those that had trouble with paperwork. I assumed that anyone who “continued to own such Shares through the expiration date for the Offer” was eligible for the tender.

Lessons Learnt

• Never completely trust 3rd party press release
• Don’t forget to go over documents and the important paragraphs
• Many Over The Counter (OTC) companies have odd lot tenders
• Companies probably know more about tenders than the average investor
• You don’t learn these kind of things in business school
• Some things are too good to be true

Disclosure

No positions held in any stock mentioned

[tags]odd lot, tender, special situation[/tags]

How is an individual investor able to get an edge over millions of others and especially institutions that spend every waking hour analyzing companies and crunching numbers? I mean, the way to profit is to know something that others don’t. Right?

It’s All About The Odds

For new or recent readers, I believe that investing is just like poker or any other form of game EXCEPT I control the odds, stakes and the bet. If an opportunity arises where the odds are in my favor, I would take it. If a bet came along where I had 60% of winning and 40% of losing, I would take it each time because probability confirms that in the long run, I end up winning. However, this all depends on how much capital is allocated and what your own risk rating is. 60% of winning $100 with a 40% chance of losing $500 may not suit everyone but a 75% chance of winning may change that factor.

It boils down to picking your spots. No blind bets should be made without calculating the odds, risks and timeline when investing in special situations.

What Is a Stock Tender?

A stock tender is when a company announces that it will be buying back a certain number of shares at either a specified price or in the form of a Dutch auction.

The purpose of a tender offer could be to reduce the number of stockholders of record and reduce or eliminate future servicing fees, SEC reporting costs and stock listing fees. Especially when it concerns smaller companies, having a large base of tiny stockholders can certainly eat away profits with administrative tasks.

This is an excerpt from Pinnacle Bancshares stock tender.

“We estimate that odd-lot stockholders who own less than 100 shares represent over 37% of our total stockholder base but approximately 0.3% of our total shares outstanding. If we are successful in reducing our total stockholders of record under 300, Pinnacle plans to deregister its common stock with the Securities and Exchange Commission and delist from the American Stock Exchange. As a result of these actions, we expect to save considerable costs related to SEC reporting requirements, costs associated with implementing and complying with the Sarbanes Oxley Act, stock listing fees and stock registrar costs. We also expect to reduce the significant amount of management time devoted to these activities.”

As a real example, Jonathon from My Money Blog participated in a stock tender with United Rentals (URI) where he purchased shares of URI at $19.81 which the company bought back for $22. Timeframe for this was under 1 month, so the gain of approx 10% is annualized to over 100%.

So the idea of a stock tender is pretty straightforward, but there are risks involved.

The Risks

This is a form of arbitrage but I do believe the risk is lower than merger acquisitions, where there are many factors that could suddenly cause the deal to fall apart. Unlike mergers, stockholders, FCC, regulations, protests, earthquakes etc are unlikely to cancel stock tenders.

Now back to the risks…

• A company announces that it will buy back a certain number of shares, in United Rentals (URI) case, 27 million shares were to be bought back ranging from $22-$25. There is a risk that too many people would tender their shares and cause an oversubscription whereby your lot of shares may not be completely bought back (but there is a way to prevent this, which I will get to later on).
• The company should have enough cash or have financing in order to buy back the shares. Just like in risk arbitrage, if the company doesn’t have the funding, the tender will get cancelled or amended to a lower buy back price.
• Management could withdraw the tender at the last second. Nothing is set in stone when it comes to special situations.

Odd Lot Tenders

In case the tender is oversubscribed, people holding odd lots of shares under 100 are given preference when shares are bought back. This means, if you hold 99 shares and somebody else holds 100 shares, your tender is given a higher priority. Those who hold more than 100 in an oversubscribed tender will have their shares bought back at a pro rated basis. Thus buying 99 shares ensures the best return.

In some cases, companies specifically announce odd lot tenders where they will only buy back shares from those who hold less than 100 shares.

This is one of the areas where the small investors have an advantage over the big boys.

Some Things to Know

Once you purchase shares, you have to call your broker to let them know you want to tender your shares. I do all my investing through my 401k account with Fidelity and they charge $38 for the tendering. Buy commission of $10.95 and sell commission of $38 is $48.95 in fees alone, so choosing your spots is very important.

Don’t forget to factor in the capital gains tax as well.

I haven’t participated in any tenders yet, but there is one I plan to participate in come Monday. I’ll provide details as it unfolds.

With numerous realized gains of say 10%, the individual investor is able to profit even in such unstable and uncertain markets with minimal risk. This isn’t speculation and if you give the additional effort to look for it and read a few paragraphs from the SEC filings, your portfolio could do very well.

Disclosure

No positions in any stocks mentioned