Arbitrage: Emageon (EMAG)

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Jae Jun

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For those that have noticed my Twitter updates, a merger that I have been looking into is Emageon (EMAG).  The spread at the closing date of Jan 16,2009 was 47% with a closing deadline of Feb 11, 2009. This leaves us 3 weeks to work with if the deal is sealed in time.

Basics Of The Merger

  • Deal first announced on Oct 13, 2008 and worth $62m
  • If the deal goes through, each share of EMAG will be converted to $2.85 cash
  • Shareholder approval obtained and no other approvals required
  • Financing is being handled by Stanford International Bank Limited(SIBL)
  • Financing was cancelled at first on Dec 23 followed by a decision to continue.
  • All debt buyout by Health Systems Solutions (HSS)
  • SIBL holds over 20% ownership of HSS

Termination Details

The merger is at a stage where it is too late for the buyer to try and terminate the deal, however, the deal is not bound by any harsh conditions. The merger can be cancelled quite easily with neither party having to pay a termination fee on a mutual written consent. There are some conditions where EMAG will have to pay $3m if HSS cancels due to EMAG breaching the following rules:

  • our Board withdraws, modifies or qualifies, or publicly proposes to withdraw, modify or qualify, in a manner adverse to HSS and Merger Sub, our Board’s recommendation to our stockholders that they adopt the merger agreement;
  • our Board approves, recommends or endorses, or proposes publicly to recommend or endorse, any takeover proposal other than the merger;
  • our Board enters into any letter of intent or similar document or any contract accepting any takeover proposal;
  • we fail to include in this proxy statement the recommendation of our Board of Directors that our stockholders vote “FOR” adoption of the merger agreement; or
  • we intentionally and knowingly materially breach any of our non-solicitation and related obligations with respect to acquisition proposals;

These are basic merger agreements so we don’t have to worry about EMAG having to pay $3m for breaking these conditions.

After the merger announcement on Oct 21, 2008, HSS deposited $5m into Escrow and recently deposited another $4m after SIBL came back right after refusing to finance the deal. If the deal is now not completed by the new extended date of Feb 21, 2009, EMGA is entitled to receive the $9m in the Escrow account.


Under the merger agreement, we agreed with HSS to make, if applicable, all appropriate filings with the United States Federal Trade Commission and the Antitrust Division of the United States Department of Justice, under the HSR Act, and all appropriate filings under foreign competition or merger control laws. However, other than the filing of a certificate of merger with the Secretary of State of the State of Delaware in order to effect the merger, we do not believe that any regulatory filings or applications, including under the HSR Act, are required to be made in respect of the consummation of the merger

Nothing to worry about on the approval side. Shareholders have approved the deal so there are no further regulations holding the deal back.


The important thing to note is that a 50% spread does not refer to the chance of a deal being abandoned. Let me digress for a moment.

The spread points more towards the number of scared and uncertain people. E.g. on Thursday Jan 15, 2009, PSD, which I’ve covered numerous times, fell to $26.50 the day before the closing date announcement. PSD jumped to $29.60 the following day. Mergers are driven more by fear and uncertainty than evidence. Did you know that too many Wall Street and big players do not read the SEC filings? So how does the market know everything? It doesn’t. Now back to the topic.

The biggest risk to this deal is whether financing will hold but there are signs that it will. After the shocking news that SIBL decided to refuse financing, the press release from both parties expressed that they are still determined to go through with the deal and seeking other options if necessary. Shortly after HSS deposited another $4m into the Escrow account. Seeing as how HSS is funding 100% of the deal through debt to SIBL, HSS must have sold more convertible debentures to SIBL. In other words, SIBL financed a further $4m right after a refusal to finance.

This brings me to some questioning points;

  1. SIBL is completely crazy to finance another $4m (total $9m) if they don’t plan on going ahead with the merger
  2. It was an act of faith by SIBL and HSS to ensure the markets that they are committed
  3. The only reason SIBL made that annoucement in Dec was to try and extend the merger date to make certain they could meet the deadline or
  4. SIBL had tax, year end or quarterly numbers they had to meet and made up a bogus annoucement

However, the December report from SIBL, reaffirms its investors that “although our earnings will not meet expectations in 2008, Stanford International Bank Ltd. is strong, safe and fiscally sound.”

I’ll leave it up to you to come up with your own conclusion, but I am leaning towards 3 and 4.

Also, we have to consider whether EMAG is the type of company that is worth holding if the deal fails. PSD was an easy one because it had a long history, electricity is a necessity and they also offer a nice dividend. EMAG has none of these qualities. Considering their short history, high cash burn rate and regular dilution of shares, EMAG is not a company I would like to hold in any normal situation other than a buyout.

Completion Checklist

  1. Due diligence by both parties – Yes. Both have clearly stated so.
  2. Financing and regulator approval – Yes. SIBL has recommitted and further financed an additional $4m
  3. Get preliminary shareholder sentiment (or controlling shareholder approval) – N/A
  4. Obtain regulator (SEC, FCC, any and all) approval – N/A
  5. Get final shareholder approval at a meeting called for that purpose – Yes
  6. Insiders continually vesting or buying shares – No. Accipiter Capital Management is the only big buyer in Dec. Insiders have not been buying but they have not been selling or exercising their options.

Odds of the Merger

Current Price: $1.94

Upside Potential: 47% / $2.85

Downside Potential: 47% / $1.02

Probability of Success: conservative: >60% | realistic: > 75%

Probability of Failure: conservative: < 40% | realistic: > 25%

Time Frame: min: 3 weeks | max: 11 weeks (3 months) until March 31,2009.

Additional Remarks

The interesting thing with this deal is that EMAG has $19.5m in cash, will receive $9m if the merger fails for a total of $28.5m which equates to $1.33 of cash per share. If the deal fails and EMAG falls to $1 again, we are entering another type of special situation where the company will be trading for less than its cash value.

With a potential $1.33 of cash per share, is EMAG worth $0.61 if we are to buy at the current price of $1.94? As I stated above in the risks, I am not sure how much the company is worth.

The odds are very enticing, but my failure probabilities and the quality of the company makes it difficult to make it a big position if I do decide to buy.


No positions at time of writing.

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32 responses to “Arbitrage: Emageon (EMAG)”

  1. CarlD says:

    The principals, including SIBL, have posted SEC filings stating that they are committed to the deal. SIBL stated they have the money and they are on board with closing on Feb 11.

    HSS is basically a shell which can only become viable through a merger with an exchange-traded business.

    Barring a complete market meltdown between now and Feb11, the deal will close.

    What are the risks? Really the only unknown is that SIBL is an offshore bank with unverifiable assets and might have to deal with investor redemptions.

  2. Jae Jun says:

    Take a look at their 2008 mid year report. Financially, they look very good and plenty of cash to support the deal.


  3. PlanMaestro says:

    Even though I have EMAG, in your case I would check NNDS. Less unknowns and higher probability of closing.

  4. Jae Jun says:

    Hi Planmaestro,

    Can you clarify what you mean by less unknowns?
    What do you consider to be the probability of closing for NNDS?

  5. Josh says:

    I do not understand the business deal or business plan behind the scene.

    Why on earth EMAG management will allow a shell company to take over them? Any bonus they got after the merger?

  6. Jae Jun says:

    Berkshire Hathaway could also be considered a shell company. Although you have a valid point, I dont believe it matters for the deal. EMAG clearly wants to be sold which is the most important thing.

  7. I have no strong opinion on EMAG either way but to answer a question above:

    JOSH: “Why on earth EMAG management will allow a shell company to take over them? Any bonus they got after the merger?”

    One reason companies use shell companies during takeovers is to limit liabilities. If something happens and the buyout firm gets sued, only the shell company will face problems.

    Sivaram Velauthapillai’s last blog post..Barack Obama: A historic presidency

  8. innocentbystander says:

    Has anyone checked SIBL’s business model? They take deposits and invest in the financial/stock markets. Returns have been consistently in the “teens” for the past 15 years, clearly outpacing any benchmark, particularly over the last 5 years. Deposits have increased 34% interannually on average since 2000.
    The auditor is one C.S Hewlett, a local firm in Antigua.
    Am I the only one who finds this all a bit “strange”?

  9. Jae Jun says:

    Here is some info from their website

    “The Stanford investment philosophy will not produce dazzling returns and doesn’t always follow current trends, but it has proven year after year that it can protect principal and grow capital consistently.

    Many examples exist to show how Stanford has gone against the investment crowd mentality of the moment and invested in stocks and bonds that were undervalued and out of favor with Wall Street at the time. During the tumultuous 1987 market collapse, SIB’s portfolios were well positioned and ended the year producing double-digit returns, while the leading market indexes finished the year only marginally positive. The wisdom of this strategy was also proven in 1994 when the Federal Reserve set out one of its most aggressive series of rate hikes, and again in 1997 when the Asian Crisis sent shock waves through the global markets……. “


    Are you finding it strange because of the whole Madoff thing? or is it objective?

    If you look at the previous reports, they go to great lengths to outline every income and expense. Full transparency.

    I would call the performance solid and great rather than “strange”.

  10. MKL says:

    Hi Jae Jun and everyone else. It is so nice to find level-headed discussion. I have two comments, one on SIBL for EMAG and one a question on PSD.

    On SIBL, I followed every google bit and found some very questionable attitudes surrounding them. I cannot be sure, however, that that which I read was based on anything solid. But neither could I find their full transparency until recently. Innocent Bystander, do you find it strange that they use a local Antigua auditor? I am not yet nervous about them.

    On PSD I am wondering about the logistics. Assuming it goes through on February 6, when do I get the money to be able to trade again? I’ve never done the likes of this before, so I have no experience. Thank you to anyone who can help.

  11. Jae Jun says:

    Hi MKL,

    I must agree that the act they pulled in Dec is very questionable. I’ll have to try and dig up some info now that there are more people that are concerned about their behaviour.

    Regarding PSD, your shares should be converted to cash and in your account within a week of the closing date.

    My broker charges me $10.95 per trade which makes my expenses sky high, so I’m waiting for the conversion rather than selling out.

  12. MKL says:

    Hi Jae Jun,

    If you mean the act they pulled in December by hesitating on their participation in the deal then here is my thought: Its gotta be tough to be in banking or dependent on banking these days, unknown territory to all. As EMAG’s deal depends on SIBL’s financing, so SIBL’s deal within it might depend on other financings they have going on, and all those interdependencies in that industry are in quite a mire these days. I do think there are honest deals trying to go down in honest ways, getting these pipelines “unfrozen”, that are sidelined truly only for the complications that seem to be inherent in the banking world THESE DAYS.

    From that perspective I don’t think that SIDL “pulled” anything but instead were quite honest and upfront. I have googled all over tarnation and cannot find the article that left me with that impression, but I seem to remember (“remember”! I can’t find documentation anymore!) that SIBL as much as said that due to complications in the banking world IT was not able to close on the date that the two participants had agreed upon with SIBL. Hence the extension. Now, all I can find is: EMAG Says” received letter from Health Systems indicating Stanford International Bank will not provide funding to consummate transaction at this time” which is sort of BLEAK since nothing I can find right now in the chatter confirms that SIBL is still committed. They may have had to pull out on their commitment. Completely. It seemed I had the impression that SIBL had recommitted, or extended the timeframe so they could commit. Can no longer find anything like that. It was not wishful thinking on my part, since I was only marginally interested in this deal. I think, though, that news pieces get pulled/replaced by new ones.

    I would like to hear at this point from EMAG/Health Systems about the financing, some sort of reassurance on the financing. Either some reassurance from SIBL or from EMAG/Health Systems that they are seeking financing elsewhere.

    The $9 million earnest deposit at this point does not guarantee a deal. Seems they NEED a bank to help them through this process, they can’t do it on their own. Rather than lose the 9 million (I think they do really want the deal) they would just extend it AGAIN to find financing. That’s why I would like some sort of communication on it from SIBL.

  13. Jae Jun says:


    Thanks for your thoughts.

    As tough as the banking sector is at the moment, I find it very unprofessional that SIBL would decide to withdraw and then agree to refinance the deal without providing any reasons. I would prefer that HSSO comes out with the reason why SIBL decided to withdraw and personally, I hope the parties dont release press release to reassure investors as that would only cause the spread to close.

    Regarding that $9m, you are right that it doesn’t guarantee the deal but it is a very good indication that the deal is going to be closed. I don’t think HSSO and SIBL will want the lawsuit that follows should one of them drop out anytime.

  14. MKL says:

    Hi Jae Jun, I think it was said somewhere, I just can’t find it anymore to cite it — so much for THAT. But I do seem to remember it being said that SIBL simply needed more time due to unexpected difficulties within the sector, hence the extension. Some communication on the timing would be nice, but as you say it might narrow the spread. But that is just personal. I already am impatient to get my cash from PSD (thank you oldschoolvalue) so that I can put it to work somewhere else. A Feb closing of EMAG vs a May closing would be quite significant information to my participation.

  15. Chad says:

    I found an 8K SEC filing by HSSO dated 12/29. It doesn’t explain why the financing was withdrawn initially and then recommitted, but there is a letter from SIBL to HSSO expressing support and financing…

    SIBL remains committed to fulfilling its obligations under the Purchase Agreement and agrees to its obligations to fund the Merger in its entirety on February 11, 2009 or such earlier date as may be agreed between HSS and SIBL. SIBL acknowledges and agrees that it believes that it will have the ability to timely consummate the financing contemplated by the Purchase Agreement on February 11, 2009.

    This deal is starting to tempt me. I would be confused why SIBL would commit 4M more to escrow if they weren’t fairly sure they can finance the deal. My biggest issue is I really don’t want to hold EMAG if the deal fails. I agree with Jae Jun, PSD was holdable….EMAG not so much.

    Something else I was thinking about. I noticed Obama is pushing for more digitizing of medical records. Seeing as how EMAG does this, maybe another positive for HSSO to close deal?

  16. Jae Jun says:

    @ MKL
    I’ll have to keep searching MKL but thanks for your input. Very helpful.

    @ Chad
    Thanks for that Chad. I searched all over the place but I couldn’t find any statement on the reasons for the delay as well.

    I’ve been thinking about this deal a lot lately and trying to find ways in which the deal can fail and the risk of this whole merger but I can’t seem to find or think of anything more than what I’ve written.

    The odds are very enticing and I still haven’t bought 1 week after writing up my thoughts in hopes of finding additional information, but my odds still stand as it is. Looking to buy soon with a little over 2 weeks remaining.

    I didn’t know Obama was pushing to digitize records.. but if that truly is the case, maybe QSII will be a good play again.

  17. MKL says:

    Hi Jae Jun. Still looking at EMAG. Had a new thought. IF the deal with HSSO does not go through, AND EMAG gets their $9m, though its not a company I am interested in holding either, it does become an even more attractive merger proposition for someone else. This limits a bit the downside risk of having to hold it. Even with this, however, it still prolongs the timeframe that my investment is tied down, keeping me from other opportunities. Has EMAG ever had any other propositions? Who might be interested in them?
    I went back through their news releases in their Investor Relations section on their corporate site. Perhaps you knew this already but in June, after a prolonged drop in share price, they settled a proxy fight with Oliver Press Partners resulting in two new directors being added to their board with the intent of changing/enhancing the future of the company (and stock price) including sale of the company. They then hired, in July, some advisors to help them look into selling the company. At that point the share price was around $2. Then, of course, the Fall of 2008 happened to everybody. And their share price is still around $2.
    I think the Oliver Press Partners directors are aggressively interested in their stake. According to MFFAIS they hold the most EMAG shares, 3,569,360, and their investment has lost $2m (-23%)so far. I think if this deal does not go through then there WILL be another one. It would be just a matter of T I M E!
    Their share price hovered around $15 in 2005 and 2006, and then had its slow and steady decline to the $2/3 range of 2008. I wish I knew what the $15 was based on, what the PE had been, other numbers. And, what caused it to slide.

  18. Jae Jun says:


    I didn’t know that OPP appointed 2 directors but I did see their acquisition of EMAG (SEC form 4 filings)and more importantly their purchase price was at around $2.30

    I just found out that OPP also owns 3,569,360 shares of HSSO.

    Accipiter Capital Management is also another big shareholder that purchased around $2.50.

    You make a very good point that there could be another buyer some time later, but I prefer to leave this out of the equation (for now) as I don’t want hope to affect my decisions. Whether they are a good target for another company is a question I will have to ponder seriously after Feb 11 if something goes wrong. Until Feb 11, I’ll have to continue searching for info on SIBL.

    I will continue to think through the probabilities without external factors.

    But do keep us updated on your thoughts. It is very insightful and helpful to work through different scenarios together.

  19. Jae Jun says:

    Here is more info on EMAG and SIBL that might interest readers.

    This is what Chad referred to above. SEC filings for HSSO.

    Read exhibit 10.2 which is the letter from SIBL to HSSO regarding their commitment to finance and waivers to some conditions.

  20. Eric says:

    DISK appears to be a similar opportunity to EMAG. I haven’t started digging into it yet because I’m still focused on EMAG. After/if EMAG closes it might be a new opportunity to look at. It’s supposed to close sometime in the first quarter. The shareholders meeting is Feb. 24, so I imagine it would be sometime after that.

  21. MKL says:

    1) SIBL owns 3,569,360 shares of HSSO?? That is bizarre in a bizarre sort of way that makes me smile! Wonder what THAT is about? When did they get their HSSO?
    2) Thanks for giving the link, I was glad to read it.
    3) Could not find what the waived condition was, nor the amendment to the waiver.
    4) I think I’m going in.

  22. Jae Jun says:


    I meant Oliver Press Partners owns 3,569,360 shares of HSSO. See this filing right at the bottom of the page. But SIBL does own 20% of HSSO because SIBL has been providing HSSO with equity in excess of $12m for several years.

    The waived conditions are “Sections 6.2(a), (c) and (d) of the Merger Agreement”.

    I missed out on my order today. Will have to set it again tomorrow.

  23. Jae Jun says:

    @ Eric,

    Will take a look at DISK if EMAG closes on Feb 11. Since there is still a shareholder vote, I’ll wait until that passes as well as any other approval.

  24. MKL says:


    Just reporting the facts, and that’s one of them… Would like to be a computer sometimes.

  25. nqwr says:

    @ERIC and JAE

    DISK is not a good opportunity. If you look at the merger agreement, DISK is being acquired by “The Concieived Group” which has no assets. The Conceived Group is a wholly owned sub of NYX, which has very limited assets (i.e. not nearly enough to pay for the acquisition of NYX). NYX in turn is a wholly owned sub of Q-Black, which is a privately held entity without publicly available financials. So you can’t see if Q-Black is a worthy counterparty that can actually close on the transaction.

    In addition, the equity commitment letter between Q-Black and NYX is not disclosed so you can’t see if there are any financing outs. The financing language in the merger agreement does not adequately address the financing and counterparty risks; but in any event one always wants to be able to read the equity / debt commitment letters first hand to see what outs may exist. I have not read the rest of the Merger Agreement to see if there are other flaws with the transaction as this was enough for me to say “pass”

  26. MKL says:

    Thank you NQWR. I haven’t looked at DISK but out of the corner of my eye since I’m involved in other situations right now. I will so want to look at other situations when I am free again so what you’ve said is helpful.

  27. Jae Jun says:


    Thanks a lot for the info. I wont be looking at it now. You also raise very good points in how to study mergers and the depth of research it requires.

  28. Andrei says:


    DISK is definitely not a good opportunity as they just released the following press release concerning their proposed merger on Feb. 2nd: http://www.businesswire.com/portal/site/google/?ndmViewId=news_view&newsId=20090129006396&newsLang=en

  29. You may want to read this article (ours is in Spanish) about SIB and the “Duck Tales” article referenced in it:


  30. CML says:

    Jae Jun
    (This my first posting ever, so please forgive, if I am off base …)

    This may be a moot point now, given developments over the past week or two, but …
    On Jan 26 in your response to MKL you stated:
    “I meant Oliver Press Partners owns 3,569,360 shares of HSSO. See this filing right at the bottom of the page. But SIBL does own 20% of HSSO because SIBL has been providing HSSO with equity in excess of $12m for several years.”

    However, my reading of that filing is that this was reporting the proxy agreement among OPP and several other holders of Emageon shares to have them voted in favor of the acquisition of Emageon by HSS.

    Your comment on Jan 26th made me wonder about any possible OPP ownership relationship on both sides of the HSS-Emageon deal. It seems that this filing does not raise such a possibility.

    It seems OPP is just the “Activist Investor” they claim to be, and they got burned in this deal by a situation they knew nothing about.

    Is there anything I am missing here?

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