I have recently been watching CRD/A shares and CRD/B shares trying to figure out why there is a difference between the price of the A and B shares. I talked to the company today and this is what I found out:
The only difference between the two shares is B has voting rights and A does not. The two classes of shares have existed since 1990 and there has never been this large of a discrepency between the two prices. The founder owns 51.8% percent of the voting, B shares and his sister in law owns 5.8%. So between the two they own nearly 58% of the voting shares. Therefore, the idea that perhaps someone is bidding up the B shares over the A shares to get a good vote is not necessarily a good one, because one person essentially controls the company and his sister in law owns another good chunk. The company says they do not know why there is a difference and they are waiting to see if perhaps someone is taking a position in the B shares but they don't have anything yet that says either way.
So, to the point of this thread. I would like to discuss possible arbitrage situations between the A and B shares of publicly traded companies. Let's start with perhaps the most famous A and B shares. Berkshire Hathaway has A and B shares and the ratio of A to B is roughly 30:1. One can see from a 3 year chart that this relationship stays fairly even over time.
stockcharts.com
So, if one would short the BRK/A shares when the ratio was 32:1 last week and buy the B shares, then they would converge back to 30:1 and one could make some money there. Let's say someone was wealthy enough and able to short one share of the A shares at $138,990 at the Friday close and put an equal amount in the B shares long at $4,595, netting 30 shares. At the current time, 11:29 today, the shares are at $4,465 and $134,200. So one would be up $4,790 on the short and down $3900 on the long, for a net gain of $890. This would be on an investment of $276,840. Subtracting $50 for conversation sake on commissions from the $890 equals $840 one day gain or .3%. Not a huge gain, but one would almost think an automatic gain. However, one would have to have a lot of money to do this and the gain is also small % wise. Friday was a classic time to do this as the ratio had spread out significantly by close.
Now CRD/A and CRD/B have a 65% discrepancy as of the beginning of this writing. Theoretically, these shares should trade close to 1:1, but the B shares would always have maybe a small premium due to the voting power, but as mentioned above the voting power is nearly meaningless owing to the large management position. As one can see, the ratio between the two held pretty high throughout 05, 06 and part of 07, but has since widened significantly, setting new highs (or lows depending on the numerator and denominator) this last week.
stockcharts.com
If there is no difference, other than meaningless voting rights, between the two shares, then the ratio should be 1:1 or .90:1 or somewhere in that range. So, I ponder, is this a classic arbitrage play between two, essentially equal, classes of shares? I have never done an arbitrage play, but I am studying this one. I tried to enter into an arbitrage play this morning, but there were not shares available to short. Does anyone have any thoughts on this arb play or perhaps another arb play between class A and B shares?
Thanks
feraldo |
