This are my notes regarding the Merger Arbitrage trade from Motolora's acquisition of Tut Systems (TUTS).
The good news is that the acquisition was completed as mentioned on 7th March. Motorola completed the sale at $39m or $1.15 per share. I bought at 1.10, a bunch at 1.04 ~ 1.05. My returns from the past 1 month range between 5% to 9%.
While this was a decent trade, I had to make several decisions along the way. Like earlier this week, the price fell to $0.96. I was undecided whether to buy more on margins. And even if I had spare cash, would it have been a good decision to throw more money into this trade or not ? Note that the average closing rate of mergers is about 89 to 91% But if the trade did not go though, the subsequent fall in the share price could be brutal, in the case of TUTS, I assumed the share price could have dropped to the 52 week low of 86 cents.
I am reminded from James Altucher's book that Warren Buffett usually trades with a back up plan. Either the company being bought over has strong fundamentals and is undervalued or it generates healthy dividends to cushion any share price fall in case the deal does not go through.
In the case of TUTS, this is an unprofitable tech stock with lumpy sales that is thinly traded, and it doesn't dish any dividend. It could have made sense to double down, because I knew that Motorola needed the technology and frankly 39m is chump change in the carrier business. But how much stock to double-down ? I made the mistake of buying the last position on margins, no doubt it worked out well, but I could have put my money at unnecessary risks.
I will now add a new criteria to my rules on Risk Arbitrage trade:
1. Is this an all Cash Transactions (preferred) ?
2. Has the board approved of the transaction ?
3. Have the shareholders voted and approved of the transaction ?
4. Are there any Management Incentives to close the deal ?
5. When is the deal going to close ?
6. Are there any unresolved Shareholder lawsuits ?
7. Anti-trust ? Or are FDA, EU Approval needed ?
8. Is the company under investigations by the SEC ?
9. Are there any price reductions clause in the agreement ?
10. Whose price rose or declined after the announcement ?
11. Does it pay a dividend ?
12. Is it cheap to own if the deal does not go through ?
13. Who is buyer ? What history does it have
14. Does the Buyer need the Acquired ? What does it need
15. If you are thinking of double-down, do you have a plan B if the deal does not go through ?
This is from the generated results from Marketocracy,com, remember I started out with a virtual 1m dollars, and $10 as NAV, and I have been buying 40k per stock since Jan. [more]
This is Mechanical Investing list for 2007 April. See December Blog for exact criteria. I run this monthly mechanical investor screen to buy 2 virtual stocks every month on marketocracy.com, this is my backup plan in case my real world stock picking fails me. (see next post for ytd results).
CSG Vanilla: This is based on James O'Shaughnessy' Cornerstone Growth criteria.
SNKI Swank, Inc. Jewelry & Silverware
APN Applica Incorporated Appliance & Tool
CHDX Chindex International, Inc. Medical Equipment & Supplies
SYX: Systemax Inc
CPY: CPI Corp
SLP Simulations Plus, Inc.
ANGN Angeion Corporation
SPAR Spartan Motors Inc
GRIL Grill Concepts
CSG Insider: Also based on the Cornerstone Growth formula, with an added component of Net Positive Insider purchase. My 2006 experiment showed better performance when CxOs & directors of a company are buying stock.
APN Applica Incorporated Appliance & Tool
CHDX Chindex International, Inc. Medical Equipment & Supplies
CNST Constar International, Inc. Containers & Packaging
XIDE: Exide Technology
CHMP: Champion Industries, Inc.
Tex: Terex Corp
Vir Virco Mfg Corp
IOSP: Innospec Inc
FRN: Friendly's Ice Cream
MFI Vanilla: This is my interpretation of Joel Greenblatt's Magic Formula investing.
PWEI PW Eagle, Inc. Fabricated Plastic & Rubber
RAIL FreightCar America, Inc. Railroads
NVR NVR, Inc. Construction Services
FCX: Freeport-McMoRan Copper & Gold Inc.
EGY: VAALCO Energy, Inc
PXP: Plains Exploration & Production Company
PTEN:Patterson-UTI Energy, Inc.
PNCL: Pinnacle Airlines
BMI: Badger Meter Inc
MFI Insider: This is similar to "MFI-Vanilla" with an added component of Net Positive Insider transaction.
PWEI PW Eagle, Inc Fabricate d Plastic & Rubber
FCX Freeport-McMoRan Copper & Gold Inc. Metal Mining
ARLP Alliance Resource Partners, L.P. Coal
UNT: Unit Corporation
IXYS: IXYS Corporation
USG: USG Corp.
PONR: Pioneer Companies
CNW: Con-way Inc. [more]
Hoo ! Hoo ! I was prancing around when I read the press release around 12 noon. I spent all the spare cash on TUTS as an arbitrage position and it finally closed. Happy as a Lark. Will do another write up on the lesson learnt.
1. Kick-Backs from Intel -- Not a sustainable way of doing business
2. Sales Reps are compensated for selling 3rd-party items, like iPods, Plasma TVs etc
3. Ugly Machines
(this is my second post on TUTS, please see previous post on this risk arbitrage opportunity)
I laid down several lines on TUTS yesterday nite (i am 12 hours behind), one at $1.02, another at 1.04 all limit orders before the market opened. Nothing seemed to bite, and I was afraid that this would be a repeat of last week where limit orders could not get fulfilled. The amount I was fishing wasn't that big, but a check on TUTS's daily volume ranged between 20k to 100k a day. This was obviously a thinly traded stock. The company was due to be bought over by Motorola for a tidy sum of 39 Million and the deal was going to be consummated sometime this week (or as the filing said, End of Q1 2007). Motorola was buying this at $1.15 a share, and had paid proxy voters to vote for the acquisition, it also announced plans on opening shop in Oregon (presumably TUTS' office). MOT needs TUTS for the IPTV technology to sell to Carriers and possibly catch up with Nokia and Cisco in the lucrative NEP carrier maket (versus the low-margin Handset market).
My current position in TUTS was still too small to make the initial spread (<5%) meaningful. I needed the 10 cent spread and more shares to make it worth-while. If I were successful tonite, the returns would be (1.15 / 1.05) -1 = 0.095 or 9.5% spread. 9.5% gain within a week (excluding commissions), I simply needed more shares now.
At 10.30pm (or 10.30am US time) I was desperate, I decided to try the dangerous Market order, market order is "unsafe" for stocks with low liquidity because with such low trading volume the prices could escalate very quickly without recourse. The market order yielded four transaction at around $1.05. While each transaction required a commission, I was partly comforted by the fact that once the Motorola acquisition is completed, the cash back returned will be commission-free. [more]
I finally pulled the trigger on my second 1/3 position position on GGC. I am still down at 8%. And will really do a hard look at GGC if the price continue to decline significantly further. The last 1/3 will be the last line on GGC. Hopefully I do not have to activate the buy.
Francis Chou of Chou Associates Management Inc, uses seven indicators to test the risk of permanent capital loss in the market, you can read more from the latest annual report found here : http://www.choufunds.com/ann_reports.html [more]
This article is a review of the book 'How Countries Compete" authored by Richard Vietor. [more]
"Do not assume or take things for granted" [more]
According to Robert Cialdini's, there are 6 tendencies of Human Behavior which generates a positive response. This is very useful knowledge when we are trying to persuade people or we ourselves are the target of some sales tactics. [more]
.... and using RIMM and AAPL as examples...
As a 4th generation Nokia Communication user, (I started with 9110, 9210, 9500 and now 9300i). I think Nokia has it right with the E90, for the first time, the communicator is more powerful than other Nokia models. [more]
This article highlights that perhaps this celebrity Financial advisor may be giving below average advice when it comes to stocks and "advocating a "sell after small declines" strategy that is coupled with a "buy things that have been on the rise" concept, leaving investors in a position to sell low and buy high." [more]
( For clarity on What is Risk Arbitrage, please check the previous posts. Unlike risk-free arbitrage, Merger Arbitrage has risks, roughly about 87 to 91% of the deals go through, but the potential lose of investment can be as much as -25% if the deal does not go throughl. Many have liken this to vacuuming quarters in front of a bull-dozer). [more]
I have been using the PrecisionIR service for the past year to order Annual Reports both US & European. The service is free and the reports are sent to your doorstep. Not all annual reports are available, but I have been able to find gems like Apollo Group, Finished Line, SC Pool Corp and best of all, the UK gaming annual reports including Cryptologic which has more data and goes back longer than what is filed in the US. [more]
Excellent article titled "China’s Bull Market Bullsh*t" about how investment banks will use any justification to prop up a bubble market. This website, Asia Sentinel has alot of no holds barred editorials.
What's interesting about last week's plunge is how Investment Newsletters are using it to pump their wares to investors out there. [more]
"The recency effect, in psychology, is a cognitive bias that results from disproportionate salience of recent stimuli or observations." -- Wikipedia [more]
"Basically, this means markets are at an equilibrium…until they aren't. And then speculation takes over and brings things to a feverish pitch that can't be stopped by rational theories of economics, throwing out the efficient market theory at this time." [more]
The following are small-caps stocks on my watchllist. I maintain a watchlist and aim to build up a circle of competence around these stocks. It helps me from being distracted during volatile days. [more]
The Speadsheets from the Screening output can be viewed here: [more]
This is a continuation of the Mechanical Investing experiment. In a nutshell, I have created 4 paper portfolios in marketocracy.com, each with 25 stocks, 2 to be purchased for each portfolio every month. If this experiment is consistently successful after a few years, I will consider using my real money to invest in it, especially if my individual stock picking is unsuccessful. [more]
I am undecided on DJ. This stock has seen better days. While recent results look good, bottom line was boosted by the sale of assets. [more]
Looking at STZ, these are my notes: [more]
"I intend to hire a younger man or woman with the potential to manage a very
large portfolio, who we hope will succeed me as Berkshire's chief investment officer when the need for someone to do that arises."