Value Investing Arbitrage?

This article originally appeared on The Div Net on April 8th, 2009.

Occasionally, an investor may believe a stock to be undervalued based on his estimate of the business' underlying value. If his estimate is correct, he should generate excellent returns over the next several years if the stock price converges to the underlying business' value. Sometimes, however, an announced merger transaction will allow this investor to buy this stock at an even cheaper price! Consider TAT Technologies (TATTF), which we've discussed as a potential value play. 

TATTF already owns 60% of Limco-Piedmont (LIMC), an aircraft maintenance provider with a market cap of $30 million, no debt, and cash of $32 million! TATTF now wants to own the other 40% of Limco-Piedmont, and has offered LIMC shareholders 1 TATTF share for every two LIMC shares.

With TATTF's share price at $4.90, and Limco-Piedmont's at $2.24, investors are offered the opportunity to acquire TATTF's stock at an additional 10% off! (An investor looking to make a quick buck could purchase two LIMC shares and short-sell one TATTF share for a handsome profit margin.)

Of course, nothing is a sure thing. Although TATTF controls Limco-Piedmont and therefore the merger should be quick and easy, unknown factors could come along that derail the transaction. As such, investors should ensure they understand LIMC and are comfortable with the investment as is. However, since LIMC is already fully consolidated as part of TATTF (due to its controlling interest), a share of TATTF represents a significant interest in LIMC already, and therefore shareholders of TATTF should already know the acquisition target well.

Disclosure: Author has a long position in shares of TATTF