Tuesday, January 3, 2012

Buyout Offer At Manhattan Bridge

On Thursday, Manhattan Bridge (LOAN), a stock that has been discussed a few times on this site as a potential value investment, received a buyout offer. The stock closed up some 22% on the news, but it probably shouldn't have.

It's not that the buyout offer wasn't substantially higher than LOAN's stock price. The offer of $1.30/share represented a 44% premium to the stock's previous price.

It's also not true that the offer wasn't credible. The group making the offer already owns more than 5% of the company, and offered a plan to close the deal within 90 days.

The problem is that more than 50% of the company's votes are controlled by its CEO. A CEO who appears to want to run this business for a long time (based on his recent compensation package, which ties him to the company for 15+ years) and who is unlikely to be willing to sell this company for a large discount to its assets, which is what is being offered.

Unfortunately, there isn't a whole lot that minority investors can do. We can hope that the company buys back shares at this price, but we've been hoping for that for a long time. We can hope that the company liquidates itself to realize value at the current price, but again that is likely wishful thinking.

Instead, the most plausible scenario for seeing the stock price discount reduced may be the success of the company's lending operations. If the company can generate its cost of capital, only then are we likely to see this discount abate. This is likely what management is trying to do, and hopefully it can get there without taking too much risk.

Disclosure: Author has a long position in shares of LOAN

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