Jaclyn proposed to go private by conducting a reverse split where 250 shares would become one share. This was then to be immediately followed by a forward split where each share would again become 250 shares. Holders of less than 250 shares before the split were to receive $10.21 in cash per share. The goal of this transaction was to reduce the total number of shareholders of record to less than 300, a requirement for taking a public company private. Since this was a classic going private transaction, I think it makes for good learning example. It’s been a while since I’ve detailed my experience with one of these going private transactions, so for many of my newer readers this will be informative.

I first started tracking Jaclyn after it made its initial going private transaction filing and preliminary proxy on December 21, 2007. The first thing I looked for in those filings was how the company planned on treating holders of shares in street name (shares held at a broker). Companies are not required to reduce the number of street name holders when going private, they only need to have less than 300 holders of record (where the shareholder’s name is actually on the stock certificate). The Special Situations Real Money Portfolio is a Coverdell Educational Savings Account and many of the members of Contributor’s Corner also trade in IRA accounts. These custodial accounts for tax purposes cannot take physical delivery of shares. Thankfully, Jaclyn stated in their preliminary proxy that they intend to treat stockholders holding their common stock in street name in the same manner as record holders. This alone increased the attractiveness of this opportunity, since I would be able to take advantage of this opportunity in a tax efficient way and with lower expenses (no costly stock certificate mailing needed).

Jaclyn was trading at just above $6 on December 21st. On the next trading day, December 24, 2007, shares of Jaclyn had jumped to $6.75. Given the turmoil in the credit markets and my past experience with going private transactions, I decided to not rush into this opportunity. Jaclyn was going to need credit to complete this transaction and it often seems that these companies underestimate the potential number of shares they will have to cash out. I find that the risk that the going private transaction will be cancelled is somewhat reduced if you wait until an actual vote date is announced for the proposed going private transaction. This usually occurs during the next phase of the going private transaction when the definitive proxy is filed.

There were some early positive signs that this going private transaction would go through smoothly. A comment left by member of Contributor’s Corner early on noted that the executive chairman, chairman, president, and vice chairman, who combined control 50.9% of the stock, intend to vote FOR this deal. He also noted that the company estimated it would cost approximately $1,916,000 to complete the transaction, so with $769,000 on the balance sheet at the time, Jaclyn would only need a bit over $1 million in credit. Given that their bank increased their credit line to $3 million in order to purchase shares, it looked like Jaclyn had both the votes and money to complete this going private transaction.

Then in February, Jaclyn issued another preliminary proxy. At this point I thought the rewards were starting to outweigh the risks associated with this going private transaction. The market also was thinking the same thing, and the price of shares climbed from below $7 to over $8.

Members of Contributor’s Corner were getting pretty excited about this deal. In total, there were 33 comments regarding Jaclyn in Contributor’s Corner. Some of the newer members were concerned that this deal looked too good and might contain risks that they weren’t considering. Some of the more experienced members and myself noted that it would probably take 6 months or longer for this transaction to complete. I personally use 6 months as a rule of thumb for most of these going private transactions from the date of first filing. The main risks for me at this point concerned whether Jaclyn might decide not to treat street holders the same as record holders or even decide to shelf the deal due to the market environment at the time.

Several more weeks followed before I took any action. On April 3th, the price of Jaclyn shares declined by 15%. Members of Contributor’s Corner wanted to know if anything had happened. I researched various sources and found no news. It was just Mr. Market getting nervous that there hadn’t been any news. I decided it was time to act. I put in a limit order and bought 200 shares. I got the shares for $7.65 per share, and my total cost was $1,536.95.  Normally, I would buy 249 shares in this situation, but I didn’t have enough cash in the account at the time to do that.

Then just a few days later, Jaclyn issued a definitive proxy for the going private transaction. The proxy indicated that the vote date would be May 7, 2008. This was very good news and shares of Jaclyn promptly climbed back to over $8 per share as the risk associated with this transaction went down.

The next question I started to receive was about when the last possible date would be to aquire shares and still get cashed out.  My personal rule is to buy shares at least a week before the vote date, since shares take a few days to settle and sometimes the effective date for a reverse split can occur on the same day as the shareholder vote if management is real quick. Buying shares after the vote date can be a real gamble unless the company clearly indicates what the exact effective date will be. I’ve heard a few reports of individuals not being cashed out for the Jaclyn deal because they bought too late. Thankfully, none of the members of Contributor’s Corner reported this problem (probably since I warned them).

On May 7th, positive signs started appearing. A delisting noticed appeared in the SEC filings for Jaclyn. By May 9th, most members noticed that the Jaclyn entry at their brokerage accounts changed. The ticker symbol was replaced by a number or other symbol and some even noted that their brokerage entry for Jaclyn stated “contracts”, reorg, or “for cash out $10.21/sh.” The one thing we did not see was the results of the vote, but with these small companies it can take a few days for the voting results to be reported. The company finally reported the results of the vote on May 12th in a release.

In just over two weeks after the vote date (May 22, 2008 to be exact), I received $2042 automatically in my account for the 200 shares of Jaclyn I had. In total, I held these shares for just 49 days. For my initial $1,536.95 investment, I made $505.05. This come out to a total return of 32.9%. The real performance number to focus on is that this little workout produced a 245% average annualized rate of return! Now you know why I like going private transactions so much. If you also find yourself attracted to these type of opportunities, consider joining Fat Pitch Financials Contributor’s Corner where you can review current opportunities and study past deals.

Disclosure: I no longer hold a position in Jaclyn (JCLY).

Ricemutt signed up as a paying member of Fat Pitch Financials Contributor’s Corner a few months ago and asked me if she could write about her experience. I agreed and she posted an article detailing her first ever special situation investment (Advanced Nutraceuticals) based on information posted in Contributor’s Corner. This past Thursday Ricemutt posted the results of her experiment. I’m happy and proud to report that Fat Pitch Financials Contributor’s Corner helped Ricemutt earn $259.51, a 14.9% gain. She calculated that her investment had an annualized return of 176.4% (APY).

In contrast to My Money Blog’s experience, Experiments in Finance reports:

I like that with ANII, I didn’t have to do anything additional after I purchased the shares. Overall, this was a very hands-off, easy transaction. Unfortunately, easy gains like this one aren’t always around, but I certainly like the opportunity to have some extra cash via a good value investment whenever possible!

I too like these going private transactions for the same reasons. These relatively low risk opportunities provide a great option to put cash to work while you wait for the next fat pitch. You can find these going private transactions and other special situation opportunities by joining Fat Pitch Financials Contributor’s Corner.

Let me run through the stats on this transaction.  I purchased 1,600 shares of PVC Container for $2.31 per share on March 8, 2006 for a total cost of $3,702.95, including commission.  At the end of the day on April 17th, I received $2.39 per share just as specified in the terms of this deal.  That comes to a total of $3,824.00 in cash that I just received.  I netted $121.05 on this little investment, which is a 3.3 percent gain on my original investment.  In the 41 days that it took for this transaction, I made an average annualized rate of return of 29 percent.  While this was not one of my highest rates of return, it was still very good and had a low risk.

Today, I reinvested some of the proceeds from this deal into another special situation investment.  This time I’m investing in a closed end fund trading at a nice discount to net asset value (NAV) that is planning on conducting a tender offer in the near future. I found out about this great opportunity from one of the members of Fat Pitch Financials Contributor’s Corner. I’ve just posted the details of this opportunity on Contributor’s Corner. 

In addition to the Going Private Transactions List, I also track odd-lot tender offers and other special situation opportunities that members of Contributor’s Corner submit.  I reward great ideas like the one I just received with an additional week of access to Contributor’s Corner.  No good deed should go unrewarded.  If you are interested in receiving access to Contributor’s Corner please consider supporting Fat Pitch Financials.

Let me quickly run through the performance stats.  The 999 shares of Major Automotive Companies I purchased for my son’s Coverdell Education Savings Account cost me $1,605.35 and I received $1,898.10 on Wednesday, March 29.  That netted me $292.75, which is an 18 percent gain on my original investment.  It only took 63 days for me to be cashed out of this deal.  Taking that into consideration, my average annualized rate of return for this transaction comes to 106 percent!

I now have $2,075.44 in the Special Situations Real Money Portfolio.  You might be able guess what I’m going to buy tomorrow, but if not, you can find out by joining Contributor’s Corner. 

By the way, a few weeks ago I mentioned that I bought another stock for the Special Situations Real Money Port.  That stock was PVC Container (PVCC).  I purchased 1,600 shares for $2.31 per share.  PVC Container plans on cashing out shareholders holding less than 2,000 shares for $2.39 per share.  The transaction was just approved by shareholders, so hopefully in a few weeks I will receive cash for this going private transaction as well.

By the way, I also mentioned yesterday that Major Automotive Companies shareholders approved their going private transaction. In a few weeks, I should be getting cash for this transaction. There’s been a lot of activity this week in the Special Situations Real Money Port, but I guess that is to be expected after the lull in activity over the past few weeks.

If you are curious in finding out what I just purchased, you can find out in Contributor’s Corner.  If you are patient, I’ll tell you all about this transaction next week when this deal is completed.

Major Automotive indicated that they would cash out shareholders holding less than 1,000 shares for $1.90 per share.  This is a classic reverse/forward stock split with a cashing out of fractional shareholders, my favorite type of deal.  It looked like a good deal to me, so I purchased the maximum number of shares that would qualify for the deal.

Today, Major Automotive Companies announced that shareholders approved the going private transaction.  In a few weeks, I plan on receiving a total of $1,898.10 in cash for this stock.  This would generate a profit of $292.75.  That’s an 18 percent return in just over 40 days.

If you are interested in these types of transactions, you might want to consider joining Fat Pitch Financials Contributor’s Corner.  I maintain a detailed database that is updated daily with the latest going private transactions.  The Contributor’s Corner community actively discusses these opportunities and even shares other types of special situation opportunities with members.  It’s a very profitable little corner of the web that I really enjoy being involved with.

As expected, I received $0.50 per share for the 1,999 shares in my son’s Coverdell Education Savings Account.  Of the $999.50 in cash, $152.97 was pure profit.  That is an 18 percent gain on my original investment of $846.53.  That’s 106 percent annualized rate of return.

A significant amount of work goes into tracking down and keep up with these going private transactions.  You can always do the work yourself by scanning the daily list of SEC filings.  Alternatively, you might consider contributing to Fat Pitch Financials and gain access to Contributor’s Corner.  Contributor’s Corner provides the best going private transaction list on the internet.  It is updated daily with updates.  Members of Contributor’s Corner have also been providing information on other special situations. You might just save enough time with Contributor’s Corner that you can focus on more high quality profitable opportunities.

Let me take a closer look at how I made out on this little deal.  In just under 2 months, I made $97.99, which is a 50 percent gain on my original $195.05 investment.  That is a 311 percent average annualized gain!  I’m happy with that.

You can review my past activity by reading my recent Special Situations Real Money Portfolio 2005 Performance update.  Members of Fat Pitch Financials’ Contributor’s Corner receive notifications indicating my current purchases for Special Situations Real Money Portfolio and also have access to a list of similar going private transaction opportunities that is updated daily.

Yesterday, all 1,999 shares of Refocus Group in my Special Situations Real Money Portfolio were cashed out for $0.35 per share.  I received $699.65 for the shares that cost $566.67.  That earned my son’s Coverdell ESA $132.98 or a 23 percent gain.  Since I only held these shares for 39 days, this trade earned a 220 percent average annualized rate of return.  I was pretty happy with this little trade. 

Now that I have a bit of cash pooled up in this account, I’ll start looking for a new opportunity.  I’ll be closely reviewing my going private transactions list this weekend to identify the best opportunity to invest this cash.  You can gain access to my list of current opportunities by contributing to Fat Pitch Financials.

There was no lack of great opportunities this year, but my son's Coverdell ESA did lack funds many times to take advantage of the full range of opportunities. I look forward to adding another $2,000 dollars to that account in the next few weeks now that a new year has started.

Let me update you on what has happened so far in my real money portfolio. The detailed transactions are listed in the table below. Each transaction in the table is linked back to the post that discussed that purchase, sale, or cashout.

Closing the year out, my positions at the close of the market on December 30, 2005 are as follows:

As you can see, my recent additions include JB Oxford and Refocus Group. There is a problem with the cash out of my Refocus Group shares, but I am hopeful that Firstrade will resolve it soon. For now, I am using the $0.27 value per share that is listed on my account summary page. That value may go up or down depending on how this issue gets resolved.

The JB Oxford's going private transaction was completed on January 4, 2005. However, since I'm doing this update for the 2005 calendar year, I used the closing price of $1.72 for December 30, 2005 instead of the cashout value.

Now that I've gone through all the transactions and my current account balance, let me take a look at my performance. I have invested $4,000 in this account and I am up a total of $519.58. That's almost a 13 percent gain on my investment. The internal rate of return since this portfolio was first funded on October 19, 2004 is by my calculation 12.1 percent APY. For the 2005 calendar year, my performance was 8.4 percent APY. That is almost double the 4.91 percent return for the S&P 500 for 2005.

I was bit surpised at the performance of the Special Situations Real Money Portfolio. Given the losses that Central Federal Corp. caused, I didn't think that I would beat the S&P 500 index this year. Hopefully when the Fed stops raising interest rates, Central Federal Corp. will recover a bit so I can close out that position.

I look forward to the increased flexibility that I will have in this account in 2006. There were several opportunities that I couldn't participate in due to a lack of funds. If you are interested in current going private transaction opportunities, consider contributing to Fat Pitch Financials to gain access to my exclusive daily updated detailed summary of current going private transactions.

Members of Contributor’s Corner can extend their access by one week for being the first to post news regarding an arbitrage opportunity, submit an in depth stock valuation analysis for a good investment opportunity, identify and correct an error on the site, or any other significant contribution. We already have an active community in Contributor’s Corner. I just wanted to reward and continue to encourage the great exchange of information.

Just visit this link to make your initial contribution securely via PayPal.

I purchased the 499 shares of FragranceNet.com all the way back on June 7, 2005. I got those 499 shares for $0.58 a piece. My total cost, including commission, was $297.37. I made $186.66 on that trade, which is a 63% gain. Given that investment took 204 days, that trade had 139% APY or using my new metric it comes out to 112% average annualized rate of return.

I thought my rate of return was going to be less than 100% this time, since the transaction took so long. However, I still made a superior return given the low risk nature of this transaction. FragranceNet.com definitely had a lot more drama than most going private transactions, but I think it was still worth the effort. If you are interested in current going private transactions, I encourage you to contribute to Fat Pitch Financials to gain access to my list of current going private transactions.

Let me first start with an update regarding the partial cash out of the FragranceNet.com shares in my BrownCo account. As you might recall, last week I learned some additional details regarding the FragranceNet.com cash out of shareholders owning less than 499 shares. I sent BrownCo an email regarding what I learned from Mr. Dennis Apfel, the CEO of FragranceNet.com. This is the response I received from BrownCo on Friday, December 23, 2005:

Thank you for contacting BrownCo, LLC; An E*TRADE Financial Company.

I understand your concern. I am showing that the remaining shares of
Fragrancenet.com have been cashed out. You account has been credited for
the full amount due.

Please be advised that your concerns are very important to us, and your
complaint has been forwarded to our management team for review.

Sure enough, when I logged into my account today, I discovered that the remaining 124 shares of FragranceNet.com in my account were cashed out at $0.97 per share. It looks like BrownCo finally agreed with my stubborn insistence that all 499 shares should be cashed out, especially given the information I sent then regarding what I learned from the CEO of FragranceNet.com. It really shouldn’t have been this hard but BrownCo really made a mess of this going private transaction. The lesson here is that it pays to keep an eye on your broker’s actions in your account.

On another note, I also discovered that all 499 shares of FragranceNet.com in my real money portfolio, which is my son’s Coverdell Education Savings Account at Firstrade.com, were cashed out today. I received $484.03 in the account for the 499 shares and I didn’t even get charged with a reorganization fee. Tomorrow, I will figure out the performance statistics for this transaction and share them with you here.

Thank you for contacting BrownCo, LLC; An E*TRADE Financial Company.

Corporate Actions informs me that FragranceNet.com did not accept all
the tendered shares for cash out. All the unaccepted shares were moved
to the new cusip, 351684204, FGNT.

Per our current fee and commission schedule, there is a $25.00 fee for
any mandatory cash reorganization. This information may be found on the
website home page by clicking the “Fees and Rates” tab.

Should you need additional information, or would like to speak with a
representative, please call us at 1-800-822-2021, Monday through Friday
7:30 AM – 8:00 PM ET.

I was not too convinced by this response, so I called up the number that was provided. My call was directed to John, in Corporate Actions. John indicated that all FragranceNet.com shareholders with BrownCo had about 75 percent of their shares cashed out.

I asked him why this occurred. He indicated that the instructions to cash out 75 percent of the shares came from the Depository Trust Company(DTC). The inference being that FragranceNet.com did not provide the DTC sufficient funds to cash out all the shares. I found this hard to believe since there are no regulatory filings with the SEC indicating that the cash tender for those holding less than 499 shares would be less than complete. In addition, I’ve heard back from several readers here that they have been completely cashed out of their shares of FragranceNet.com at other brokers.

I told John all of this, and I also told him that I thought that BrownCo might have received less than sufficient funds to cash out the shares because some shareholders with BrownCo might not have filled out the form that FragranceNet.com required for shares to be tendered. This thought gave John some pause and he put me on hold. When he returned, he told me that their records indicate that all FragranceNet.com shareholders with BrownCo submitted the required form. John thought that I should contact FragranceNet.com to find out what was going on. I chuckled that it is almost impossible to get information from investor relations at FragranceNet.com, since all such calls are only handled by the CEO according to the staff there. Needless to say, I haven’t had much luck getting information from the CEO, Dennis M. Apfel, in the past.

This afternoon, I decided to try to call FragranceNet.com anyways. The same usual routine occurred where I got transferred to Mr. Apfel’s assistant who indicated he was in a “meeting” and that she could take down my name and number so that he could call me back. I did this grudgingly and then I hung up.

After steaming for a few minutes, I decided that I was going to file a complaint with the SEC regarding this whole mess. My smart wife told me to call FragranceNet.com back and have my message for Mr. Apfel indicate that I would be contacting the SEC next Wednesday to file a complaint and that he should contact me before that point if he wanted to address the issue. Sure enough, the assistant quickly changed her message taking routine when she heard that. She told me to wait on hold and that Mr. Apfel would speak to me. After being on hold for a minute she came back on the line and told me that Mr. Apfel was on a call and would return my call in the next few minutes.

To my surprise, he actually called me back in ten minutes. Mr. Apfel did not sound too happy to hear that I was planning to file a complaint with the SEC. I told him my complaint that BrownCo was not properly funded to cash out its FragranceNet.com shareholders. Mr. Apfel confidently told me that he had cashed out 100 percent of shares from all shareholders owning less than 499 shares. He also indicated that I was the second upset caller from BrownCo he had received today. Mr. Apfel went on to tell me that 2,900 shares were in fact denied the tender offer, but they were associated with people who held more than 499 shares in total. Some shareholders just held the shares in different units according to Mr. Apfel and those were denied. Mr. Apfel also stated that he sent a copy of a letter sent to DTC to BrownCo indicating which shareholders should not be cashed out.

Given this explanation, I am starting to understand what is going on. I believe the problem is indeed with BrownCo or possibly DTC if they didn’t forward to letter to BrownCo. It appears that BrownCo did not identify the shareholders that Mr. Apfel identified as having more than 499 shares potentially across several of their accounts. Instead, it looks like all shareholders of FragranceNet.com at BrownCo were treated equally and that is why the partial cashout occurred.

This also helps explain why one commenter here using Fidelity did not get cash but instead got new shares, while one member of Contributor’s Corner also using Fidelity did get cashed out. It looks like Mr. Apfel, using that form that was mailed out in November, went the extra mile to identify shareholders that held FragranceNet.com in multiple accounts and exclude them from being cashed out.

The lesson here is that there is real danger in double dipping on these going private transactions using multiple accounts. If FragranceNet.com was successful in preventing these accounts from being cashed out, other companies might take similar action in the future.

BrownCo still needs to address this issue. I sent them an email with the details Dennis Apfel provided. I’ll let you know what kind of response I receive.

This afternoon I checked my account with BrownCo and I discovered that I finally received cash for my 499 shares of FragranceNet.com. But wait, I discovered that not all the shares were cashed out. My account history indicated that:

REORG FRGNE FRAGRANCENET.COM *CONTRACUSIP: CASH OUT* FRGNE UNACCEPTED SHARES

I was confused a bit, so I called up BrownCo. It took me 5 calls to finally make it through to customer service, since I kept getting disconnected by BrownCo’s phone system.

When I finally got a representative, I explained the problem of the 124 shares not being cashed out. He indicated that they did not receive cash for those shares, so my account was not credited with cash for those shares. I told him that those were not the terms of the transaction as explained in the SEC regulatory filings. The representative indicated that he could not do anything about it. This was not at all like the response I got from Firstrade regarding Refocus Group.

I am not at all pleased. I also sent an email to BrownCo indicating that I wanted cash for all 499 shares of FragranceNet.com or I will be transferring my account to another broker. I’ll let you know what kind of response I get tomorrow. If this issue doesn’t get resolved, I think I will be sending a message to the NASD and SEC regarding this issue. I think Etrade will be loosing a lot of BrownCo customers if this is the kind of treatment individual investors get.

My guess is that not all holders of FragranceNet.com filled out and sent to BrownCo that FragranceNet.com form in November for the cash tender. BrownCo, therefore, probably only got three quarters of the cash for the reverse split shares from the transfer agent. They probably didn’t keep track of which customers sent in the forms, so they are just proportionately allocating the cash that they received from FragranceNet.com. If that is what happened, then it is completely unfair to the shareholders that jumped though all the hoops to get their shares cashed out. On top of it all, BrownCo had the nerve to charge a $25 fee for this mess. BrownCo needs to straighten this out right away and they should refund the $25 fee considering how poorly this transaction has gone so far.

Something strange happened in the Firstrade account. The reverse split and cash out was not registered. I think it had to do with the fact that I bought the shares right before the reverse split transaction was effected. I called Firstrade and I also sent them an email indicating my problem.

Here’s the excellent response I received:

Dear George XXXXX:

Thank you for e-mailing Firstrade. Please pardon the delay in our response.
Per our investigation, it is indeed a mandatory re-organization. However,
there is an error in the processing and the last 1,000 shares that you
purchased were not processed. We are currently tracking down these shares
and they will be processed accordingly. Please allow time for processing.

Should you have any additional questions, concerns, or suggestions, please
feel free to contact us.

Sincerely,

Firstrade Client Services

I am glad they are investigating this issue and are not ignoring it. I’ll let you know how it gets resolved.

I’m have another going private transaction problem in my BrownCo account, and that response so far has not been very satisfactory. I’ll tell you about it shortly.

The advisory committee voted 18 to 1 that most companies with a market capitalization below $700 million be excused from assessing their internal controls over financial reporting and from having their auditors certify those controls. The committee also recommended that most companies with a market cap below $100 million be exempted from Sarbanes-Oxley entirely; the current threshold is $75 million.

You can read the rest of this article on the committee meeting regarding small business exemptions from Sarbanes Oxley regulations for more details. The article also covers an unrelated change making it easier for foreign issuers to more easily delist their stock and terminate their reporting obligations.

• Prefiling Announcement
• New Filing
• Amended Filing
• Definitive Proxy
• Approved by Shareholders
• Completed
• Cash Received
• Canceled

Prefiling Announcements occur on occasion. Some companies that are considering going private issue a press release or announce their intentions in a conference call or shareholder meeting that they are considering going private.

This is a somewhat rare event that there is a prefiling announcement. I do not track stocks that make prefiling announcements regarding their intention to take their companies private since it is rather speculative whether or not they actually go through with the going private transaction given that they have not even made the required regulatory filings yet.

New Filing phase starts when a corporation makes its initial SEC filing indicating that it will be conducting a transaction that may result in the company going private. A corporation can go private if it reduces the number of shareholders of record below 300. I first start tracking a stock when it makes an initial going private transaction filing with the SEC.

On occasion, there can be a pop in the price of a stock after it first makes a going private transaction filing if the cash out price is substantially higher than the trading price of the stock before the filing. However, you have to be very quick to take advantage of this phenomenon. The effort and risk associated with capturing this initial price spike is often not worth the effort and risk associated with it.

Amended Filing refers to the phase that starts when a corporation revises their going private transaction SEC filing. It is very typically that a company has to revise their filing several times to address issues raised by the SEC. On occasion the terms of the going private transaction may change during this process, so it is important to track these amendments. After two or three amendments, I believe the risk that a corporation may not complete the going private transactions starts to decline.

Definitive Proxy phase starts when a company submits a definitive proxy to the SEC and mails their shareholders the terms of the transaction. In most cases, the company also requests shareholders to vote on the proposal. However, in some cases, especially when insiders own most of the shares, the corporation is not required to seek shareholder approval (this is allowed under corporate laws of some states) and they may decide to not to conduct a vote.

The definitive proxy phase is likely the lowest risk phase to invest in a going private transaction. Other investors share this same view and often the price of the shares of companies that are going private will rise in price for a day or two immediately following the filing of a definitive proxy. However, when the definitive proxies start arriving in the mail, the stock price often drifts back down in price. I believe that when the definitive proxies arrive in the mail shareholders, who may own more shares than the tender offer limit, may first learn of the proposed going private transaction or they now realise that it is very likely that the transaction will be completed, so they sell their shares in order to avoid owning stock in a very illiquid issue. If the price of the stock does drift downward, this is often a good time to make a buy order for the stock. Things could still go wrong after this phase, but the risk is much lower.

Approved by Shareholders refers to the phase that occurs after the proxy vote date when the results of the proxy vote are announced but before the going private transaction becomes effective. This phase is often fairly short and may not even occur at all if the transaction becomes effective as soon as the shareholders approve the transaction.

The risk of the transaction not being completed at this phase is even lower than during the definitive proxy phase. However, this is also the phase in which management may decide that the deal has become too expensive or there is some other issue and the board may decide to cancel the transaction. Some companies issue press releases discussing their concern that the number of shareholders has increased significantly. However, sometimes these press releases are just bluffs to scare off individual investors trying to take advantage of the arbitrage opportunity.

There is also the risk that if you try to purchase stock during this period that you may end up purchasing after the effective date of the going private transaction. The effective date is often only announced on the day that the transaction becomes effective. In addition, some corporations have even announced effective dates that have occurred in the past. If you get caught buying into one of these transactions after the effective date, you could end up not getting cashed out and stuck with very illiquid stock that likely trades for a lower price.

Completed refers to the phase that occurs after the effective date of the transactions or when a regulatory filing indicating that the securities registration is terminated is made.

At this point there may be some changes in your brokerage holdings list. Often the price and value of the stock that has gone private goes to zero. This is a bit unnerving but typical. The symbol of the stock often changes and the name of the security may be modified to indicate the reverse split or merger. I often see the term “Cash In Lieu” just below the name of the stock as well.

A going private stock will often be in this phase for several weeks and sometimes even a few months until cash is sent out to former shareholders. Some patients is required during this phase. If more than two months have passed, I recommend that you contact the company to see what is delaying payment.

Cash Received refers to the phase when you are finally paid cash. I am not always informed of when cash has been received for some stocks that I have not participated in their going private transactions. I rely on you to let me know when you have received your cash. This is the last phase of a successful going private transaction risk arbitrage opportunity. At this point it is a good idea to calculate your earnings, update your files and jot down any lessons learned.

Canceled refers to going private transactions that have been called off. This alternative end point is always disappointing when it occurs. Thankfully, this event is fairly rare. If you end up with stock of a company that has canceled their going private transaction, you will have to make a decision of when you are going to sell the stock. If there are other equally profitable going private transactions, you should consider selling the stock and moving into other opportunities. If that is not the case, you should evaluate the intrinsic value of the stock you own and determine if it is undervalued and potentially worth retaining.

I hope this taxonomy that I have created to track the phases of going private transactions is helpful. I would appreciate any feedback you may have that could help me improve these categories. I maintain a list of current going private transactions that includes a field for the going private phase that you may find interesting. Contributors to Fat Pitch Financials can gain access to this unique list that includes my exclusing going private phase field, so I encourage you to consider contributing to gain access to this useful information that I produce.

I encourage you to attend this meeting and voice your opinion on the impacts of the proposed changes on small investors. My bet is that no one will be at this meeting will be representing individual investors unless you can attend.

The written public comment period for this meeting closed on December 7, 2005. However, often agencies will consider comments received shortly after the deadline, especially if it is from an under represented group.

Details of the public meeting are provided in this SEC meeting notice. Other upcoming SEC events are worth watching, so you might want to bookmark the SEC upcoming meetings page. I just did.

At the end of the BusinessWeek article, Morrow notes S&P Chief Investment Strategist Sam Stovall warning “…that investors face a very difficult task if they try to cherry-pick the small-cap companies that are likely to be taken private.” That is a rather rediculous statement since the profit in going private transactions really comes from investing in companies after they disclose that they are going to be taken private. The article doesn’t even mention the possibility of profiting from the risk arbitrage opportunity that these stocks present even after they have announced that they are going private. So much for being enlightened about profitable investment opportunities from the professionals at S&P and BusinessWeek. At least you can learn about these opportunities by gaining access to the going private transactions list here on Fat Pitch Financials.