Make 25% in 2 Months with this Special Situation


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Jae Jun

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Here’s an obvious question.

You want to make money in the stock market right?

So far in the first 3 months of this year, I’m already involved in 2 special situations to boost my portfolio returns.

  1. NuPathe Part 1 and Part 2
  2. and now this one

If I calculate the time spent on each deal with the expected profit across my 3 accounts, it ‘s more than $200+/hour.

And if you followed my tutorial on setting up the Value Investor’s Google Alerts to automate the process of finding these deals, you know which special situation I’m going talk about.

25% in 2 Months with Global Sources (GSOL)

Here are the details.

GSOL intends to commence an issuer tender offer before the end of April 2014, with expected completion before the end of May 2014, for approximately 5 million shares, or approximately 14.4% of its outstanding common shares as of Feb. 28, 2014, at a purchase price of $10.00 per share in cash.  Global Sources expects to fund the tender offer with cash on hand.  As of Dec. 31, 2013, Global Sources had total cash, cash equivalents and available-for-sale securities of approximately $143.8 million.

  • Tender completes at the end of May 2014
  • 5 million shares or 14.4% of shares outstanding to be tendered
  • Purchase price of $10 per share
  • Fund with cash on hand

Here’s a nicely researched piece of the GSOL special situation on Seeking Alpha. Sums up everything nicely.

Digging Deeper to Know What You Are Getting Into

You can look up what the company does, but I’m quite familiar with GSOL personally.

I’ve used them before. I used to play the ebay arbitrage game of sourcing products for cheap from China and then flipping it. Global Sources was a good place to get ideas.

More importantly, the company is legitimate and not a reverse Chinese merger company. In other words, it’s ok to participate in this.

Back in 2010, GSOL completed a tender offer just like this. It’s nothing new to them.

The only caveat is that GSOL will be spending only half the amount they spent 4 years ago and I fully expect more shares to be tendered than the original 5m.

Here’s what happened in 2010.

The number of shares properly tendered and not properly withdrawn is preliminary and subject to change. Given that the number of shares tendered was greater than the number of shares that the company offered to purchase, it will be necessary to apply the “odd lot” priority and pro-ration provisions described in the company’s offer to purchase. The “odd lot” priority and pro-ration process is estimated to be concluded by August 4, 2010 and payment to shareholders is expected to promptly commence after that process has been completed. The company will issue payment of $9.00 per share for all “odd lot” and pro-rata shares that were properly tendered and not properly withdrawn.

Here’s how I’m thinking about this.

  • more shares will be tendered than the 5m
  • buy an odd-lot to ensure that shares are tendered
  • 4 years ago, GSOL tendered at $9 per share and paid $100m. This time, GSOL is paying $10 per share for a total of $50m.
  • plenty of cash with good balance sheet to cover this tender easily

Why an Odd Lot?

(For an odd-lot definition, check this investopedia link)

There is no mention of odd-lot provisions in the press release, but like I said, I’m expecting this deal to be oversubscribed. And if it plays out like it did in 2010, odd lot holders will get priority and have their shares tendered.

If you buy too many shares hoping to make a quick and easy 25% return, think again. You’re going to end up holding shares instead of cash.

I bought 99 shares for each of my accounts because I don’t want to hold any GSOL shares. The standard odd lot size is under 100 shares but it’s up to the company to define what the odd lot actually is.

Got a tip from a reader that GSOL defined an odd lot as 50 shares in 2010.

If you own, beneficially or of record, 50 or fewer Shares in the aggregate, you properly tender all of these Shares prior to the Expiration Date and you complete the section entitled “Odd Lots” in the Letter of Transmittal and, if applicable, in the Notice of Guaranteed Delivery (the “Notice of Guaranteed Delivery”), we will purchase all of your Shares without subjecting them to the proration procedure. – filing source

I always buy 99 shares but buying 50 or less isn’t worth it.

Even if GSOL looks like a value play, I don’t want to hold any shares purely for portfolio sizing reasons so all I can do is hope that the odd lot size isn’t 50.

Here’s Your Profit Table

GSOL Special Situation Profit Table

GSOL Special Situation Profit Table

I was able to get in at $7.80 for two of my accounts and $8.00 for the other.

I’ve read where some people have about 30-40 accounts just for special situations and by having so many accounts, profits are maximized.

e.g. instead of just doing one workout and making $200, multiply that by 30 and your total profit becomes $6k.

This is an extreme case, but interesting there are people doing it.

Make 25% in 2 Months

Get the odd lot and make 25% in 2 months for a very low risk investment. These special situations is one of the best way to boost your returns in a volatile and sideways market.

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36 responses to “Make 25% in 2 Months with this Special Situation”

  1. ForbesMan says:

    Thanks so much for the info.
    It seems easy money 🙂

  2. Jordan says:

    Thanks for posting. I’d suggest that people using many accounts for odd lot tenders will end up ruining the strategy. Because it became such a widely used strategy, most closed-end funds have discontinued their odd lot priority because it reduces the pro rata percentage of institutional holders.

  3. Nate says:

    @Jae

    It seems like you are making a several assumptions with this offer.
    Assumption 1: GSOL will purchase the shares using an odd-lot provision.
    Assumption 2: GSOL will define odd-lot as shares less than 99.
    Assumption 3: GSOL will be able to purchase all odd-lot holder’s shares.

    If any of these assumptions fail, and you are left holding shares of GSOL, what will you do then?

    I like this idea, but I’d like to understand the risk a little better.

    Thanks,

    Nate

  4. Charles says:

    Why not simply participate in the original tender offer, without using the odd-lot provision? That way you wouldn’t be limited to 99 shares, no?

  5. Jordan S says:

    Great article Jae! One side note – it looks like GSOL actually did go public via reverse merger in essence, if not in name. It was structured as a share exchange with a NASDAQ-listed shell company called Fairchild (Bermuda) Ltd. Note 3 – “Share Exchange Agreement” in the F-20 filing below describes the transaction. I wouldn’t consider it a red flag, though, given the company’s operating history and the fact that this was years before the shady China RTO trend became popular.

    http://www.sec.gov/Archives/edgar/data/1110650/000095016201500025/global20f.txt

  6. Ahh I see. I didn’t realize that. Thanks.

  7. The original tender doesn’t limit the shares. I just chose to buy 99 because I want to make sure my shares are tendered. You could buy 2000 shares, but you have a good chance of holding 1901 shares then.

  8. 1. Yes. Based on the small size of the purchase and what happened previously, I’m assuming it will be the same.
    2. Same as above.
    3. Same as above. But depends what quantity they define as odd lot.

    I don’t see a pure risk here. It’s a real company so the only risk is whether whether you end up cashed out or holding shares. (which I wouldn’t call a risk anyways).

    Real risk is if the company is shady or it can’t fund the tender, but no issues with that here.

  9. This is only possible with smaller accounts. Institutional holders can’t get into this because it’s not worth the time and effort.

  10. Thanks but no such thing as easy money :). Just need to put up good systems and processes to make the work easier.

  11. Nate says:

    There are a couple articles on SeekingAlpha that make this company seem shady. They even mention that this was indeed a Chinese Reverse Takeover company.

    http://seekingalpha.com/article/299286-global-sources-major-concerns-with-one-of-the-oldest-china-reverse-takeovers

    http://seekingalpha.com/article/305247-global-sources-latest-company-actions-speak-louder-than-words-extreme-caution-warranted

    The deal sounds enticing, but the company sounds shady. I don’t want to be stuck holding shares of a worthless company if my shares aren’t purchased.

  12. Ajvar says:

    @Jae

    “Assumption 2: GSOL will define odd-lot as shares less than 99.”

    This is your biggest assumption by far. The other 2 assumptions are sound.

    I suspect that the odd-lot will again be defined as 50 shares.

    But even with 50 shares it would still be profitable.

    I’d assume a cost (per account) of [(50 shares x $8.05) + 10$ buy commission] = $412.50.

    The return would work out to [ [(50 shares x $10)] = $500.00
    Neglecting exchange rate fluctuations, and assuming no fee your broker to tender. ~$87.50 per account. Suppose that you purchase this in a TFSA and RRSP, ~$175 per $825 outlay.

  13. I disagree with the shady claim but completely respect your opinion on passing.

  14. Yes assumptions for sure.
    I’ll see whether the tender also raises the stock price. I may be able to flip 50 before the tender is complete.
    About the potential profit though, it depends on your portfolio size. Tendering shares also costs money on some accounts.
    Fidelity charges $40 so the profit is only $50. If you have a portfolio < $30k, it's ok. If it's bigger, it's not worth it except if you want a free dinner or so.

  15. Brad says:

    I think publicly promoting how to take advantage of this
    opportunity before the odd-lot provision is even announced reduces the likelihood
    that there is an odd-lot provision. It’s
    not too unlikely that management read articles talking about their companies. Reading
    about how arbs are exploiting provisions in a tender offering, at the detriment
    of larger and/or long-term shareholders, would likely cause management to avoid
    provisions such as this. An example of
    this would be IFN, GRR and I believe there is another Morgan Stanley fund that
    is escaping me at the moment that no longer have an odd-lot provision after
    another Seeking Alpha article promoted how to bi-annually exploit this
    opportunity. I also see similar instances
    of this happing all the time in gambling forms when people talk about a
    beatable casino game at a named casino which management then reads and the opportunity
    is gone for everyone.

  16. Jordan says:

    Right – I mean that if you have a few thousand odd-lot holdings in different accounts, the pro-rate for institutional holders could be much less than 15%, rendering it more likely for the company to discontinue the practice of including an odd-lot provision.

  17. Brad,
    I understand where you are coming from, but I take the opposite view.

    I’d prefer to share these types of strategies and let people decide for themselves whether they want to do it or not.

    There are those that want people like me to not publicize it so that they can continue to perform these tenders. In the end, it’s going to come out and get shared anyways.

    Arbs will always come and go in one form or another.

  18. that’s a possibility but I’d think that companies would already be aware of investors trying to take advantage of arb opportunities. As I mentioned in the previous comment, arbs will always come and go.

    I’m sure there are people who think I’m ruining it for them by sharing all this. That’s what arbitrage is though. Can’t expect it to last forever. Might as well share with others so that they can learn and participate.

  19. Ajvar says:

    @ Brad
    I disagree. In the last GSOL tender offer out of ~11.2M shares accepted in the tender by the company, only ~13,900 were odd lot tendered. In general, the odd-lots are only a very small fraction of the shares tendered. Its reasonable to assume the ratio will be similar this time.

    @Jae
    I just called RBC Direct Investing (Canada). Apparently there is no fee for tendering shares, therefore the only cost is the buy commission/fee. Also, I explicitly asked about the treatment of multiple accounts; Each account can be treated separately, at the request of the account holder. So, unless the rep was giving misinformation (which is possible), it seems like one could have several small accounts.

  20. You have to be careful about the multiple accounts though and the fees vary from brokerage to brokerage.
    The brokerage can request that you close your duplicate accounts. If you open many accounts across different brokerages, it will work, but that’s an awful amount of work and you also have to deposit money into each.

    I’ve done tenders before with Fidelity and they charge $40. So that’s why unless it has better profitability, not worth it for some. Some other places charge $20. Some are free.

  21. Ajvar says:

    Agree. Care is required.

    As a side note, the odd-lot discussion prompted me to check out Edgar. I searched all of the tenders, and only found one other one. Unfortunately it is closing today. 99 odd-log shares. Given priority. 18.50-21 tender price. today’s price is $20.01. Given that there is 1 hour left in the day… I wonder what that is annualized 😉

    http://www.sec.gov/Archives/edgar/data/701347/000110465914014935/a14-6245_10sctoia.htm

  22. Zeeee says:

    Just to share with the readers, there may be a problem for overseas investors who are interested to tap this special situation opportunity. What I understand is that they will be slapped with a 30% withholding tax. I came across this personally and it seems that it may be a huge hassle trying to claw back the withholding tax. My investment ended up as a disinvestment with a loss of 20+% after my broker said there was nothing they could do and advised me to seek my own tax advisor.

    I’ve checked the tax statute and all. Legally, it should construe a return of capital rather than a dividend for overseas investors not residing in the US. However, one probably have to jump through a lot of hoops to claim the taxes back. Has any overseas investor came across this issue and successfully got a claim?

  23. Did it mention anything about having to be a registered shareholder by a certain date?
    I don’t know whether it’s possible to buy on the same day and then tender shares.

  24. Yup always think about the taxes and fees involved when doing special situations to determine whether it’s worth it or not.

  25. aanand says:

    Sir,
    This is an entirely unrelated question , but how an investor can learn about micro cap and small cap investing,
    I mean the step by step approach for that!!!!!!!
    Regards

  26. (other comment was moved to the proper thread)

    @aanand,
    There is no step by step approach. If there was, everyone would be a millionaire. It’s more art than science with investing. You can’t teach art. No artist became famous by taking a step by step approach. They took what their masters did and made their own form. Lots of looking, reading, tinkering, trying, testing until their own unique method became established.

  27. aanand says:

    I think the way i put my question was wrong.I know its not science,But there should be some book or some literature which deals with investments in small cap and micro caps to begin with right.Investing for different market cap should be different (that came from whatever little , I know about investment, if there is anything wrong kindly bear with me), right???? the risk and return profile , the margins , the whole way of analysis should change right, without knowing or understanding those differences, if we use a common method for all then it would be suicidal right. So that’s what ,I want to know .

  28. aanand says:

    And by the way please post the the link for that thread.
    thanks

  29. Thanos Pasias says:

    Hello everyone 🙂

    Jae, thanks for sharing this offering..
    What is the latest that one can participate in this special situation?

    Also, I’m little confused with how in general these orders appear/ get executed in your brokerage account. My broker is Trademonster by the way. For example, in this particular situation do you have to confirm that you want your shares to be tendered or it happens automatically? Another example, I ‘ve seen a photo of somebody’s portfolio where below his holding in a X firm, there was a security of that firm with a symbol X”R”. Is this how rights offering get listed? Do you have to call your broker to exercise them or is it something that generally you can do from your platform? I called my broker and they weren’t that helpful. Any merger securities, let’s say a warrant for every 10 shares and a preferred stock of the new company for every 5 shares, that they are given to you as a part of the deal just appear in your account as your shares of the parent company get swapped for cash?

    Thanks

  30. For this, you just buy, wait for a letter about the details and then call in and say you want to tender your shares.

    That’s how easy it is.

    As for mergers, you shouldn’t have to do anything as it will get converted automatically.

  31. Renaud M says:

    Already enjoying a ~10% return on paper, bought @8.27 let us hope it goes to 25% within expected timeframe! 🙂

  32. Glad you got in. I’m surprised that it’s turning out well so far on paper. Hoping it continues on up to the tender price 🙂

  33. Renaud M says:

    Yes, hoping so!!

  34. Robert says:

    how about a redux, or update on how this is working out.

    Robert

  35. http://www.oldschoolvalue.com/blog/special_situation/tender-offer/

    I’ve tendered my shares and expect the full payment to be made. All good so far.

  36. Received cash across all my accounts on June 6. Easiest 25% absolute profit made this year.

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