stock offer for tender – profit with special situations
TRANSCRIPT
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Stock Offer for Tender – Profit with Special Situations
By Jae Jun
www.oldschoolvalue.comPhoto credit: GotCredit / Foter / CC BY
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What You Will Learn
• The truth about stock tender offer• Risks to avoid in stock tender• What situation becomes an advantage for
the small investor• Some buy commissions and capital gain
tax information
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Foreword
How is an individual investor able to get an edge over millions of others?
Photo credit: Brandon Carpenter / Foter / CC BY-NC-ND
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How can they find an edge...
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Especially against institutions that spend every waking hour analyzing companies and
crunching numbers?
Photo credit: Martin Terber / Foter / CC BY
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The way to profit is to know something that
others don’t.
Photo credit: pfv. / Foter / CC BY-NC
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That is where being involved in a stock offer for tender can help you profit and beat the market.
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when it Comes to Offer for Tenders
It’s All About The Odds
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Investing is just like poker or any other
game except I control the odds,
stakes and the bet.
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If an opportunity arises where the odds are in my favor, I will take it.
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If a bet came along where I had 60% of winning and 40% of losing…
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I would take it each time because in the long run, I end up winning.
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But it depends on capital allocation and your own risk rating..
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• Pick your spots
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• Pick your spots• No blind bets
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• Pick your spots• No blind bets
• Calculate the odds
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• Pick your spots• No blind bets
• Calculate the odds
• the risks and…
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…timeline when investing in special situations and stock offer tenders.
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What Is a Stock Tender Offer?
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A stock tender is when a company announces that it will be buying back a certain number of shares
at…
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either a specified price or in the form of a Dutch auction.
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But, why buy back shares?
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1. To reduce the number of stockholders of record
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1. To reduce the number of stockholders of record
2. reduce or eliminate future servicing fees, SEC reporting costs and stock listing fees.
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1. To reduce the number of stockholders of record
2. reduce or eliminate future servicing fees, SEC reporting costs and stock listing fees.
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Smaller companies with a large base of tiny stock holders
can eat away profits with administrative tasks.
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As a real example
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Jonathon (My Money Blog) participated in a stock
tender with United Rentals
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He purchased shares at $19.81 which the company bought back
for $22.
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Timeframe for this was under 1 month, so the gain of about 10%
is annualized to over 100%.
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The idea of a company offering a stock tender is pretty
straightforward, but there are risks.
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The Risks of Stock Tenders
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This is a form of merger arbitrage but I do believe the risk is lower
than merger acquisitions
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Now back to the risks…
Photo credit: ~db~ / Foter / CC BY-NC-ND
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FIRST
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A company announces that it will buy back a certain number of
shares
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A company announces that it will buy back a certain number of
shares
In the case of United Rentals (URI)
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27 million shares were to be bought back ranging
from $22-$25
Photo credit: hunsonisgroovy / Foter / CC BY-NC-ND
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Too many people may tender their shares
w/c can cause over-subscription
Photo credit: hunsonisgroovy / Foter / CC BY-NC-ND
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OVER- SUBSCRIPTION: a situation where your lot
of shares may not be completely bought back Photo credit: TexasT's / Foter / CC BY-NC-ND
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SECOND
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The company should have enough cash or have financing in order to buy back the shares.
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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.
Photo credit: Michael David Pedersen / Foter / CC BY
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THIRD
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Management could withdraw the tender at the last second.
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Nothing is set in stone when it comes to special situations.
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Odd Lot Tenders
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In case the tender is oversubscribed, people holding odd lots of shares under 100 are given
preference when shares are bought back.
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This means, if you hold 99 shares and somebody else holds 100 shares, your
tender is given a higher priority.
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Those who hold more than 100 in an oversubscribed tender will have their shares bought back at a pro rated basis.
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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.
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In some cases, companies specifically announce odd lot
tenders where they will only buy back shares from those who hold
less than 100 shares.
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This is one of the areas where the
small investors have an advantage over
the big boys.
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Some Things to Know
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Once you purchase shares, you have to call your broker to let them know you
want to tender your shares.
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I do all my investing through my 401k account with Fidelity and they charge
$38 for the tendering.
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Buy commission of $10.95 and sell commission of $38 is $48.95 in fees alone, so choosing your spots is very
important.
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Don’t forget to factor in the capital gains tax as well.
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With numerous realized gains of say 10%, the individual investor is able to profit in unstable and uncertain markets with minimal risk.
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This isn’t speculation…
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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.
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Jae Jun ([email protected])http://www.oldschoolvalue.com
Old School Value improves your investment decisions and performs deep fundamental analysis and valuation for you.
Just like a personal stock analyst.