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Arbitrage. No, Not the Movie - Arbitrage Investing                        


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It started out as a value investment and turned into an M&A arbitrage. We found and bought shares in an undervalued high-tech company, specifically, EMC on June 19, 2015 and paid $27.02 a share. At the time we estimated its value to be around $40.00 per share. EMCs primary business was enterprise hardware and software. And they had a controlling interest in VMWare (VMW). That was selling around $72.00 a share. VMWare alone had a very promising future and the real asset that was the gem in the EMC basket.

Then on October 12, 2015, it was announced via a merger agreement that DELL would acquire EMC. On that particular day VMWare had opened at $73.90 and closed at $72.27. The very following day after the announcement VMWare opened at $70.86 and closed at $69.31. Just as a point of reference a few months down the road VMWare was selling at $61.09 on July 19, 2016. Needless to say, the announced acquisition had placed a damper on the stock price. The DELL deal offered EMC shareholders cash for each share plus the rights to 0.111(conversion ratio) in a tracking share stock tied to the VMWs business performance. Most EMC shareholders were very upset over the deal and many sold their share. So for a while the share price of EMC declined.

However, as the closure of the deal approached and all the approvals were obtained, the price of the EMC share begin to increase. They were up to $29.75 just before the EMC stock stopped trading. Thus the question is why? Well the answer is simple really. What most retail investors did not realize was that the tracking stock (DVMT) was worth more. Most thought that the big players were out to get them, by buying them out via the offer and reducing their amount of share ownership in the new company. They were being short changed as a EMC shareholder by only receiving 0.111 in the new company and it had no voting rights. And as a result many EMC shareholders sold their share out of anger. All true.

Although another way of looking at it was they would get hard cold cash which they could reinvest into another investment opportunity and that they were getting 0.111 in the tracking stock for absolutely nothing, you paid nothing for it, it was totally FREE. Not to mention, the tracking stock was tied to the best performing asset VMWare, (VMW) and a combined company of an up and coming high-tech with great potential in the market place. After the paperwork was done, the EMC share price was $28.55 and thus we realized a Cumulative Return of 5.66% (4.54% Annualized Return). And DVMT was priced at $47.20 a share and we later sold it on 3/14/17 at $63.56 which gave us a 34.66% Cumulative Return (77.73% Annualized Return). But remember, we actually paid nothing for the DVMT shares. Plus, we redeployed the cash.

As Warren Buffet has said, In the business world, the rearview mirror is always clearer than the windshield. However, as long-term value investors, we tend to look more into the future. Similar to what Wayne Gretzky (NHL player) said, Skate to where the puck is going, not where it has been. Since we thought of it differently, we held our shares as we recommended the same to our subscribers.

Undervalued companies over history have proven to provide many opportunities to increase your capital.  That is why value investing it is still around after 83 years.  When a company like EMC is undervalued, it creates various opportunities like the one discussed above. This is one of the many benefits of our service. We find specific investment opportunities using security analysis research to find undervalued opportunities for our subscribers in our PWC STOCK REPORTSSM service.

At Port Wren Capital, LLC, we specialize in picking specific undervalued U.S. stocks using fundamental analysis developed by Benjamin Graham using a five step process. We have beaten the S&P500, DJIA and NASDAQ benchmarks since we started 5 years ago on our own investments. Discover the difference for yourself. To learn more contact us today.

Published: 4/1/17

 

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