Lowball King Stuns Investors and Companies
Not-So-Tender Offers
By Erin Arvedlund
ABCNEWS.com from TheStreet.com
N E W Y O R K, Nov. 12 — George Schwartz was
surprised to open his mail and find that a
mysterious private company was making a
$7.85-a-share tender offer for his stock in
Providence and Worcester Railroad
Co.—especially when it was trading at $12 a
share.
The bidder is IG Holdings, a virtually unknown firm based
in Phoenix, Ariz., that last week made an unusual, unsolicited
tender offer for 2 percent of Providence and Worcester, a
freight carrier based in Worcester, Mass.
And Providence and Worcester Railroad isn't the first
company to be targeted by IG Holdings' lowball bids. Since
August, IG Holdings has made similar, unsolicited offers for
the shares of about a dozen public companies—some of them
thinly traded—each time contacting shareholders directly
through brokers and not the company.
The president of IG Holdings, Ira Gaines, “is an
inordinately opportunistic person,” says Schwartz, himself an
experienced investor and manager of his own hedge fund,
Schwartz Investment Counsel, in Bloomfield Hills, Mich.
“How many people,” he wonders, “have sold to him at these
ridiculous prices?”
Gaines' Low-Risk Gain
Gaines isn't talking. Reached via an 800-number listed in
offering documents, his secretary said he didn't wish to
comment for this story. Gaines' attorney in Phoenix would
only confirm that IG Holdings was formed earlier this year,
and that it is making the offers.
These offers pose hardly any risk to IG Holdings,
according to the tender offer's fine print. In documents
tendering for Providence & Worcester, IG Holdings says the
stock will be paid for “in cash within 30 business days …
after shares have been transferred.”
The 30-day window could allow IG Holdings to turn
around and resell the stock into the market at full
price—reaping a profit before it is due to repay investors.
Gregg Leff, director of strategic planning at Universal
American Financial, says “the shareholder could be paying
for them to make money—it's just an icky situation.”
Shareholders in his company, which sells a variety of
insurance products, got a Gaines lowball offer on Sept. 29, to
buy 4.9 percent of the outstanding common shares for $1.05
a share. The stock that day was trading at $2.50.
“My fear,” Leff says, “is for the 75-year-old grandmother
who simply doesn't check the current stock price against the
amount of the tender offer.”
As with most other targets of IG Holdings, Leff's
company has not been contacted by Gaines or lawyers
regarding the tender offers. Once they find out about the
offers, most target companies have urged their shareholders
to reject the deal.
Once and Future Lowball King
Gaines has said little about his strategy. In a recent Dow
Jones News Service report, he was quoted as saying “We
are searching seven days a week for stocks that trade at a
discount to intrinsic value.”
Apparently, he's an old hand at it. Analyst Bret Jordan
with Advest Inc. says Gaines used similar tactics to buy
hard-to-trade limited partnership units at deep discounts in
the 1980s.
These days, IG Holdings' initial targets have been
companies with real estate assets. More recently, though, IG
Holdings has made similar bids on more liquid household
names—stocks such as Greyhound, Friendly Ice Cream
and Spiegel.
Regulators Silent
The bids all fall under the Securities and Exchange
Commission's 5 percent floor for rules governing tender
offers. A spokesman for the agency said it has no comment
on the issue.
Yet a spokesman for the American Stock Exchange said
brokers would likely refer questions about buyout bids to the
SEC.
What does Gaines do with the shares? No one really
knows. “My take on it is IG Holdings had no intention of
taking long-term possession of our stock,” adds Clay
Strittmatter, vice president of finance at American
Residential Investment Trust Inc, a Del Mar, Calif., real
estate company that was targeted by IG Holdings.
Shareholders are bewildered, executives are incensed, but
there doesn't appear to be anything illegal about IG Holdings'
tender offers. “As far as I know there haven't been any rules
broken,” says a spokeswoman for clothing retailer Spiegel,
based in Downers Grove, Ill.
So what are Gaines and IG Holdings up to? “We can't
make sense out of it,” adds Spiegel's spokeswoman. “Is
Gaines trying to scare people into the market?”
Possibly. “When markets are heading down and there's a
liquidity crunch,” says Jordan of Advest, “there may be
nervous retail or institutional investors needing cash.”
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