When a US company announces that it will de-register its shares, it no longer has to file annual and quarterly reports with the SEC. While this can reduce expenses significantly for certain small companies, it is invariably followed by a drop in the company's share price, since the appeal of investing in a company that doesn't have to make such reports is quite low.
Three months ago, we discussed a company called Boss Holdings (BSHI, Financial) thatproposed to deregister, but that had avoided a massive drop in its share price. Its proposal included a payout of $7.65 per share for shareholders owning fewer than 100 shares. So while some downward pressure on the stock was undoubtedly placed by shareholders exiting the soon-to-be-deregistered company, upward pressure was created by new buyers looking to make an arbitrage profit by buying fewer than 100 shares.
Last week, shareholders voted to approve the measures, which is no surprise considering management controls the company. But even though this proposal is now on the verge of going through, an arbitrage profit still exists! That is, the shares still trade for less than $7.65, allowing shareholders who buy up to 99 shares the opportunity to cash in for more than they pay for their shares.
But out of all this comes another opportunity. Because of the $7.65 offer, the shares may well immediately drop soon after the reverse-split/re-split takes place, since there will no longer be upward pressure on the stock. As such, owners of BSHI who plan to stick with the company even as it de-registers may wish to sell at the current price and buy back following the transaction, presumably at a lower price. Investors in a risky mood may also consider shorting the company at its current price, on the expectation that the shares will drop following the $7.65 payout. Of course, liquidity could pose a significant challenge to such an endeavor.
Unique situations can sometimes offer investors profit opportunities. I look forward to re-visiting this situation post-transaction to observe the results.
Disclosure: None
Saj Karsan
http://www.barelkarsan.com
Disclosure: None
Saj Karsan
http://www.barelkarsan.com
