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Technology Stocks : PSIX up 26.5%, Takeover(?) -- Ignore unavailable to you. Want to Upgrade?

To: lupaka who wrote (4972)	9/10/2000 11:38:57 AM
From: lupaka	Respond to of 5650

Article mentions Xpedior & its purchase by P6 Everything You Wanted to Know About Stub Investing By David Brail Special to TheStreet.com Originally posted at 4:28 PM ET 9/8/00 on RealMoney.com Before the Worldcom/Intermedia/Digex linkup, the 3Com/Palm deal had been the most recent high-profile example of a valuable subsidiary hidden within a poorly performing parent. Here's how that stub opportunity played out: It appeared possible to purchase a share of 3Com (COMS:Nasdaq - news), sell short 1.4832 shares of Palm (PALM:Nasdaq - news) (which represented the imbedded per share 3Com interest in Palm), and be left with the other assets of 3Com at a price of minus $59 per share. When skeptics who thought this too good to be true attempted to emulate this strategy, they generally proved themselves right: There were no shares of Palm available to borrow to sell short, so you couldn't implement your hedge. The trade was, for all but a lucky few, hypothetical. Of course, when 3Com followed through with its plan to distribute the balance of its Palm shares in May, the value of the hypothetical trade converged over time, and you would have been left with $13.50 worth of 3Com assets that you could have created for a minus $59, a tidy profit of $72.50 per 3Com share -- all hypothetically, of course. But the good news is that many times these opportunities really do exist. More times than not, the stock can be borrowed, and it is possible to create the parent-company assets by selling short the per-share embedded stake in the subsidiary. Some recently completed examples include IPC and its subsidiary IXnet's joint acquisition by Global Crossing (GBLX:Nasdaq - news); Metamor's spinoff of Xpedior and subsequent acquisition by PSInet (PSIX:Nasdaq - news); and Seagate's merger with Veritas (VRTS:Nasdaq - news), in which Seagate held such a large stake it dwarfed the value of Seagate's own business. These deals all served to reveal the true underlying parent-company values, each of which had traded at enormous discounts prior to the value-unlocking transaction. The risk in these trades, of course, is that the implied discount just keeps widening. The board of the parent company has to do something to unlock the value -- either a merger of the parent where the full value of the subsidiary holding is recognized, a spinoff of the subsidiary, or some other financial engineering ploy. If the market perceives the parent's board doesn't care about the size of the stock's discount to the true worth of the enterprise, that discount is likely to widen. The passage of time can work against a stub investor as well: The discount only narrows when there is reason to believe the board will move to unlock the stub's value.