Compelling Buyout Play

Merger arbitrate idea with a juicy 9.0% spread

My favorite stocks to buy are nanocaps. I define nanocaps as companies with market caps under $30 million. They are illiquid, inefficient and you can really get a competitive edge if you do your own independent research. Nanocaps are so tiny that few institutional investors can even touch them. The smaller they are, the more inefficient they are, and the more money is to be made by private investors focused on fundamental research.

Within the nanocap realm you can find a lot of merger and arbitrage deals with significant alpha. Merger and arbitrage deals in the public space typically look something like this:

• A company announces they have reached a deal to be acquired for $1.00 per share.

• The stock moves up to $0.98 per share and giving investors a $0.02 spread or 2% return when the deal closes.

• The quicker the deal closes, the better the annualized return.

The company I am writing about today is a extreme nanocap with a $6.35 million market cap.

No one is looking at this company. It trades on the pink sheets and trades by appointment.

The interesting part about the company is the recent news that the company will be getting bought out for $2.017 per share. The current stock price is $1.85 per share, representing a 9.0% spread in the merger deal.

This is a meaningful spread and given the small size of the stock and the illiquid nature of the company, active fundamental investors can take advantage of this merger and potentially lock in a 9.0% return in short order.

I think the chances of a deal going through are over 75% and will likely close over the next few months.

Hope you enjoy…