From the may 16th comments of the fellow that runs the IPS Millenium fund. Note that he says that his tax advisors say that one can sell MCDTA and buy MCDT without snagging on the wash sale rule:
More interestingly, we finished selling all our CNL and our MCDT, and purchased MCDTA with the proceeds. I wrote about this before in early Feb. This is a very odd situation, and unless there is something going on that nobody has been able to figure out in three months, it's one of the greatest arbitrage opportunities I've ever seen.
The situation seems simple. In Feb. EMC distributed to investors the other 75% of its shares in McDATA. These were "A" shares, MCTDA. Previously they had distributed all the "B" shares (MCDT), which were about 25% of the equity capitalization of the company. Why they did it this way we haven't a clue. The "A" shares carry one full vote each, while the "B" shares carry only 1/10 of a full vote each. In a recent memo, the company said it believed that the "A" shares would sell at a slight premium of 3% - 5% to the "B" shares. Makes sense. We checked with McDATA, and each share of stock represents exactly the same proportionate share of the company, so the only difference is in the voting power. The "A" shares have ten times the voting power of the "B" shares, so MCDTA should be selling for a bit more than MCDT, if anything.
Well, sometimes the Universe is a strange place. When they were distributed, MCDTA sold almost immediately at about a $3 discount to MCDT, just the opposite of what one would expect. We figured this might happen, though, because a lot of large cap funds that held EMC couldn't own a small company like McDATA, so they had to sell their MCDTA shares. We also figured the shorts would pile on and drive the price down even more, which happened. Good arbitrage opportunity. Load up on "A" shares at a discount and wait for the gap to close. Easy money.
Well, as the market fell and time marched on, it got to the point over three months later that MCDTA sold for a discount of $8 to MCDT. It isn't the short sellers; virtually all of the shares that are short are MCDT, not MCDTA. Managers who aren't allowed to hold MCDTA should long ago have divested their shares. Sure, there are 81m MCDTA shares, and only about 36m MCDT shares, but one wouldn't think that would cause such an enormous difference in price. Having a larger float in MCDTA could be expected to maybe create a supply-demand imbalance, but that should be countered by the fact that any institution should have a fiduciary obligation to buy the MCDTA, due the greater voting power. It might not matter to an individual, but it sure as heck matters to institutions. So demand should be greater for MCDTA. Similar situations in the past with Hubbell and Food Lion have only caused very small differences in stock prices.
So what's going on here? We don't know. Evidently, neither does anyone else, including the analysts, the traders, the shorts, and the folks at McDATA itself, who should know if anybody does. Nobody has a clue. We checked with our fund's outside auditor, and they say the shares are sufficiently different that we can sell our MCDT and take the loss to use against future gains, and immediately buy back the MCDTA shares at a $7+ discount. We don't have to wait 31 days. So, we sold all our MCDT for $34, and simultaneously replaced it with the more valuable shares of MCDTA (because of the 10x greater voting power) for $27, near the peak of the spread.
Were we right? Only time will tell. There is a huge short position in MCDT, very small in MCDTA. This means that when the shorts finally replace the borrowed stock they sold by going into the market to buy it back, there is going to be a huge upward move in MCDT from short covering, but not MCDTA. However, there should be an even bigger move in MCDTA, because at some point it has to close the gap. For people like us who believe The Market is an emergent intelligence, going against it this way can be a difficult choice. However smart The Market is, though, it is not omniscient. Sometimes we can get ahead of it. Not often, but occasionally. Maybe this is one of those times.
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