Saturday, January 26, 2008

Beary Nice Day

I know, horrible title, but one my Dad, master of the horrible self-amusing pun, would appreciate. Rumors are swirling of more financial collapse in Europe and Karen Finerman noted on Fast Money last night that Ambac will be passed over by Wilbur. Big-time data coming out next week including jobs and Bernanke's next push, whether it's 25 or 50 basis points, we'll see. Financials took some lumps yesterday, and tech continued to get pounded even with Microsoft blowing the doors off of earnings. It's like California in the mid 1800s again in the gold market, as gold finished over $920/ounce. That's about $650 higher than just 6 years ago, wowwy.

Two investment ideas I've been following relate to buyout/tender offers. MGM, after a large investment from Dubai, has officially raised their tender offer to $80/share. After a fire at the Monte Carlo yesterday, shares fell back to $70. Another opportunity lies with PENN (Penn National Gaming). They received a private equity buyout offer of $67/share. Recently, PENN traded into the low 40s, but is not at $55. I'm no arbitrageur, but a recent report stated the likelihood of this deal going through as very high. These represent 12.5% and 18% returns from their current levels respectively.


I-dawg said...

There's a lot of good info here, in your article and your blog as a whole. Do you immediately invest in these companies that you are following (e.g. MGM, Penn) when you hear there are going to be buyout/tender offers? I'm also curious where you get your information for most of these articles.

AX said...

Thanks for the post, i-dawg. As I mentioned, I have not practiced arbitrage trading per se. There are formulas as outlined in such books as Buffetology that produce a percent chance of takeovers going through and thus, your expected return. Tender offers are slightly different as it is your own company buying your existing shares so they can "expire" them, bringing more value to the remaining shares. This scenario takes place through a Dutch auction, and has a very high chance of coming to fruition.

Given that both companies are actually trading lower than when buyout/tender offers were placed, two things are at play. The market is more uncertain than usual and the potential reward is higher. I believe MGM is a valuable stock either way. Had you purchase PENN at $43, you'd be a winner at its current price whether or not it ever reaches its offer price of $67.