Tuesday, April 27, 2010

De-registration Opportunities

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) that proposed 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


Brian said...

I don't think any opportunity exists here as it is already up for approval (then only 4 days or so with DTC before proceeds are sent) so only shareholders on record as of April 23rd, the date the 8-K was sent out would be entitled to receive proceeds. Any shareholders who purchase since then will be stuck in the post-split company. Let me know if you disagree.

Saj Karsan said...

Hi Brian,

Usually such transactions are accompanied by a specific record date. But since the 8-K you refer to appears to have no such date, I would tend to err on the side that what you suggest may be correct.