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Going Private Transactions: Should You Buy a Stock To Make 4% in 3 Months?

Pop1559 views  2010-10-10 07:24   TagsBCIS 

A reader sent me this email:

Hi Geoff,

I read about your investing experience with BCIS. Congratulations with the success. I am considering buying Bancinsurance (BCIS) at $8.14 in order to make $8.50 when the deal closes for a 4% gain in a few months. Not a very high return but it looks like the deal is going through. Could you give me your opinion on the deal? 



I think the deal will happen.

The annualized return is good if you buy at $8.14. We're talking about 21% annualized. The non-annualized return is low: about 4.4%.

I don't buy anything where the non-annualized return is less than 10%. Because:

a) There is always a small chance the deal won't happen and

b) There is always a big chance the deal will take longer than you expect.

In this case: the buyer is the CEO and the buyout price is low.

The low price – 89% of book value – makes the CEO want to get the deal done. Also: Bancinsurance will save money by stopping its reports to the Securities and Exchange Commission (SEC). On the other hand: Bancinsurance is a controlled company.

If the CEO runs into trouble with financing – or something like that - he won't worry about taking a long time or bailing. There's no one competing with him. Bancinsurance’s CEO doesn’t want to sell the company. And he owns most of the stock. That means it’s his bid or no bid.

The big risk is a delay. That happens a lot.

In this kind of investing: all the surprises are bad surprises. I don't expect a higher offer. That's why I sold. I had other opportunities. I didn't want to wait for the last 4%.

I’m all about the first 30% to 50%. I don’t wait around for the last 10%.

But - yes - I expect the deal will happen. Most likely: you will make a 4% profit in 3 months or less.

However: a delay is always possible.

When a board says 3 months: I calculate the annualized return as if they said 6 months. When they say 6 months: I act like they said a year.

And I pass on deals where the non-annualized return is less than 10%. Sometimes a 3 month deal closes in 1 year. I have better places to be.

In terms of pure odds: Yes. The deal will probably get done at $8.50 a share in cash by January 1st, 2011.

Talk to Geoff about Going Private Transactions

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