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Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: NikhilJog who wrote (47509)	4/19/2012 10:09:13 PM
From: Difco	1 Recommendation Read Replies (2) \| Respond to of 78753

Man, I could always use some help in this area. I tend to oversimplify situations and most I don't understand and have to move on, so it's it's been awhile since I've stuck my neck out in the area, but that doesn't mean I'm not looking. A few years ago I was in this merger arbitrage and the only way I could force myself to understand it was by making up an anecdote (I'll include it here if you have time to read it and I'll definitely take you up on the offer if I see something). In June of 2009 when reading the Wall Street Journal, I noticed a passage of the biggest stock drop of the day, a tiny company called Biotel, Inc located in Eagan, Minnesota. I got interested in the story and dug deeper and was interested how investing imitates life... Once upon a time there were two companies; Cardionet of Conshohocken, PA and Biotel of Eagan, MN which after a long courtship decided to get married (merge in business terms). The husband-to-be, Cardionet (or the acquirer as it were), decided as part of the prenuptial agreement to demand from the beautiful Biotel to drop one of its customers, or kind of saying to your wife-to-be "I don't want you to be kissing with your old boyfriend anymore". Biotel dumped the boyfriend, although had to return some jewellery he had given her (those would be any future proceeds from the sales between the two) and moved along with the wedding preparations. For a while the marriage seemed a sure thing and all the family (the shareholders of Biotel in this case) prepared for the wedding date (the shareholder's meeting to vote on the merger). The day before the event, Cardionet forgetting about the prenup, broke off the wedding stating that Biotel was courted by another man. Based on the prenuptial agreement, Cardionet was going to pay a dowry of $14 million to the family of Biotel. Regardless of Cardionet's actions, the family got together on the wedding day and voted to proceed with the marriage and subsequently filed a legal suit. Cardionet's response to this statement was: "Why don't you pay me $1 million and we'll forget about the engagement all together?" Move forward 9 months (no baby news), and the stock of Biotel had fallen down so much that the market valued the company between $3 and $4 million, simply nobody wanted to date poor Biotel anymore, as if she were pregnant indeed. Well, looked closely, not only did Biotel pulled in about $1 million annually from her full-time job as a nurse (don't ask me for what services a nurse gets paid like that), but she had no credit card debt and $1.6 million in cash under the mattress - for a young lad, Cardionet was not very enthused by the allure of Biotel's mattress. Overall, Biotel's stock on the "love market" was selling for about half of what it was carried on the books - the new family members were getting $1 back for every 50 cents they put in to be part of the extended family. On the other hand, there was the intrinsic value - potential resolution of the legal matter in favor of Biotel, which would give the family a beautiful return. What gave additional conviction at the time of joining? For once, none of the close family was deserting (i.e. there was no insider selling) and the Patriarch of the family (the CEO) held about 10% of Biotel (there's no explanation in life for this relationship besides that he was a loving father), so he was going to do anything in his power to see his daughter married. Move forward to November 8, 2010 and the resolution came - the two parties met up and kissed up (that's as much as we know about that encounter). Cardionet said that he'll pay a dowry of $11 million, or about $3.8 a share. The price of the stock shot 150% in one day. A lot of the family ran for the exits at that point, exchanging their invitations for hard cash. Well, in that hurry they forgot to read that under the new agreement, the family was going to split up the working capital (cash and receivables less any credit card debt) of Biotel. For the ones that stayed, they drank and ate at the wedding and had so much fun - even raised a toast to the young family! sec.gov