Experiments in Finance put some real money to work in two recent tender offers. These included the Fidelity National Services (FIS) and WebMD Health (WBMD) tender offers. Fidelity National Services had announced back in May that it was buying back $2.5B shares via a dutch auction, with a tender prices range set from $29 to $31 per share. The offer included a preference for odd-lots (holders of less than 100 shares) and was set to expire on August 3, 2010. WebMD Health also had a recent tender offer that expired September 8, 2010 to purchase properly tendered shares at $52. This offer for WBMD also included an odd-lot provision.

Experiments in Finance decided to buy 99 shares of FIS for $27.75 on July 15th.  She then reported on her results by posting, “On August 3rd, the results of the dutch auction were announced, and the tender price was set at the lowest end of $29. Even so, this allowed me to earn $115 in a couple of weeks’ time, or a return of about 4% after fees.”

She then went on to buy 99 shares of WBMD on August 26, 2010 for $50.70.  She was a bit nervous about provision of the tender offer that indicated that the tender offer could be canceled or modified if  “a decrease of more than 10% in the market price for the shares, the Dow Jones Industrial Average, the NASDAQ Composite Index or the S&P 500 Composite Index since the date of the Offer.”  She reported back that this provision was waived on August 30th. Given that the deal went through as planned, Experiments in Finance should have grossed a 2.6% return on that investment.  I’m sure she’ll be reporting her final results on this deal shortly. I received cash in my own account this past Wednesday for the WebMD shares I tendered in the Special Situations Real Money Portfolio.

Where did Experiments in Finance find out about these deals? She wrote the following:

In case you’re wondering, I actually find out about all of my special situations investing opportunities through a subscription to Fat Pitch Financials’ Contributors Corner and have been pleased with the service (and no, I unfortunately don’t receive any benefits from referring to them in this post!) Check it out if you’re curious to learn more. The subscribers there are pretty helpful in offering their experiences, any opportunities they find, and answering questions (such as whether there’s an advantage to tendering early, or at a higher price, or trying to purchase from multiple accounts).

I’m pretty proud of that recommendation. Consider trying Fat Pitch Financials Contributors Corner yourself for a month. Use the discount code FPF5 in order to get a one month subscription for just $10 (it’s normally $15 per month).

It’s been a while since I’ve shared with you the details of a stock tender offer. Stock tender offers with an odd lot provision are particularly attractive for individual investors since they allow holders of less than 100 shares to avoid proration that often occurs when tender offers are oversubscribed. Therefore, if you own less than 100 shares of a company that is tendering their shares, you know that you can receive a price between a certain range for all the shares you own. If you bought the shares below the minimum tender offer, you can be fairly certain that you will earn some profit from tendering your odd lot holding. These tender offers can be some of the lowest risk deals you can find in the stock market. Recently, United Rentals (URI) conducted such a tender offer.

I didn’t participate in the United Rentals (URI) tender offer (don’t ask me why), but Jonathan at My Money Blog did. Jonathan learned about the United Rentals tender offer in early July from my Fat Pitch Financials Contributor’s Corner premium service. Jonathan is a full paying member of Contributor’s Corner and did not receive any compensation or direct guidance from me on his articles about his experience with this tender offer. Nevertheless, I highly recommend his two articles on the United Rentals tender offer, especially if you have never experienced one of these transactions.

In his first article, Jonathan tells his readers about his purchase of 99 shares of United Rentals for $19.81 per share on July 9th. He then details the background of this deal. The key point is that United Rentals wanted to buy back 27 million shares using a Dutch auction with a range of $22 to $25 per share. While Jonathan admits he is a novice at these deals, he did a great job detailing the risks associated with the tender offer. He notes that too many people might tender their shares, and therefore URI might only buy a partial amount of your shares unless you own an odd lot. The other big risk is that the company might cancel or amend the tender offer. Jonathan does a great job assessing the risks and explaining his thought process. While Jonathan is primarily a passive index fund investor, he has realized that these unique special situation opportunities can help juice his portfolio. He sums up the potential of the URI tender offer by stating:

“Basically I’m trying to make $200 while putting up $2,000. That is a return of 10% over what should take a few months.”

Jonathan then followed up on July 20th with his results from the URI tender offer. It was a successful trade for him. He made $191.91 (9.8%) in less than a month, which comes out to over a 100% annualized rate of return. Jonathan notes, “Even after taxes, that will be buy me over 25 meals from the lunch carts.” That a good way to think about it. Let’s just hope he doesn’t eat all those meals at one time.

I’m just happy to know that Jonathan more than recouped the cost of his Contributor’s Corner membership. Jonathan makes an important point to note that larger shareholders didn’t do nearly as well on this deal. This is just one of those rare cases on Wall Street where the little guys have the advantage. I think Jonathan would agree that in addition to the small amount of cash he made, he also learned a lot about how special situations work. Participating in these small tender offers can help you work through many of your questions regarding tender offers, so you can gain the experience and confidence needed for much larger deals. There are only a few tender offers occurring at this time, but I suggest you review Jonathan’s experience and my past experience with tender offers so you can be ready for the next fat pitch.

Disclosure: I do not own shares of United Rentals (URI).

When acquiring an odd-lot following the announcement of a tender offer, what must be done next to ensure participation in the tender?

You need to contact your broker to let them know you want to tender your shares.

Do you receive a form in the mail which must be completed to indicate your desire to participate in the tender?

Not usually.

Do you mail this form to the company doing the tender or to your brokerage?

No, unless you hold the physical stock certificates. Normally, you should just work with your broker.

How do you ensure that you will receive the form in time to participate in the tender?

There is no need to wait for forms.

Some forms mailed to me via my broker seem to take some time to reach me. Is there often a way to find the relevant forms online?

Go to SEC EDGAR and review all the current filings for the company. You can also check the company’s investor relations webpage if they have one.

If you mail the form to the company doing the tender, do you need to notify your broker that you will be participating?

Contact the broker first, since rarely do you need any forms.

Does a broker typically charge you a commission when the tender is completed and your shares exchanged for cash?

It depends on the broker, but many discount brokers do charge a fee for tender offers. It is higher than the typical commission. I pay $25 to tender but I’ve heard of others paying as high as $50.

What do you see as the main risks to this “arbitrage”, are they simply that the tender will be called off and the stock will then trade down?

The tender price is not usually fixed, so there is the danger that the tender offer will come in at the low end of the range. There is also the risk that the tender offer could be called off or modified (lower offer). There is also the potential that the odd-lot provision is removed at the last second.

What is a company’s ability to rescind a tender once it is announced?

Corporations have great lawyers so they always leave a loop hole in so they can easily rescind a tender offer.

I know this is a lot of questions. If you have the chance to answer some I would greatly appreciate it. Once I get a little more comfortable with some of the details, I look forward to joining the Contributor’s Corner. Thanks again for maintaining the site!

We talk about a lot more than odd lot tender offers at Contributor’s Corner. We also look at going private transactions, spinoffs, and other unique opportunities that come up. The archives are also a great resource since you can read over all the questions and comments provided by other investors on deals. There are a lot of lessons learned in the over 1700 entries.

The author of these questions joined Contributor’s Corner the day after I answered his questions. If you have any additional questions about tender offers, please feel free to post them in the comments section below.

I closed July out with $12,044.13 in the Special Situations Real Money Port.  Back in May, the account was worth $12,239.27.  As you can see, I’ve lost a little bit of ground over the past two months. The account is down about $200 since May. However, that’s not too bad considering how the indexes have been dropping.

The good news is that I am still up 26.4% for the year.  My internal rate of return (IRR or APY) is an impressive 24.2% since inception, which is exceeding my expectations for this account.  To put it in simple terms, I’m up 50.6% on my investment of $8,000 ($2,000 each year since 2004).

Now let’s get to the details about what’s happened this month.  In June, I was cashed out of Tribune (TRB) in a tender offer.  That deal netted me $90.81 or a 2.8% return after all commissions and fees we taken into consideration.  On an average annualized basis, that comes out to 26% for the the 39 days that I held Tribune.  This is above my target annualized rate of return, so I was happy.

I took those proceeds from Tribune to purchase 199 shares of BNS Holding Inc. (BNSIA) for $11.75 per share.  This position climbed up to $12.75 at one point as a lot of other individual investors started taking advantage of this opportunity.  However, BNS Holding pulled a fast one on us.  On July 27th, the company issued a press release indicating that it was instructing brokers to not provide for cash payouts to any stockholders holding shares of common stock in street name.  Street name is the way shares are typically held if you are using a broker.  I was totally caught off guard.  I thought this was a done deal since the vote for the going private transaction was already successful and only a few days remained until the August 2nd date to effect the 1 for 200 reverse split. Since the Special Situations Real Money Port is a Coverdell ESA and only a few days remained before the reverse split was to occur, there was no way for me to register these shares in my son’s name in time. Shares of BNSIA plunged as all the street holders tried to sell.  I ran into trouble selling my shares due to a technical issue and my busy schedule.  I finally was able to sell some of my shares yesterday for $10.75 and I hope the remaining shares get sold for as much soon.

The Special Situations Real Money Port also had a position in Navigant Consulting (NCI).  Navigant Consulting was conducting a dutch tender offer that gave preference to odd lot holders before any prorating if the deal was oversubscribed.  I estimated that the Navigant Consulting tender would come in somewhere around the midpoint of the offer range of between $19.50 and $22.50.  I bought my shares for $20.65, but I only picked up 85 shares on May 10th because the account ran out of cash.  I made my tender conditional on the offer being greater than $20.75.  Well, the deal came in at $20.50 so my shares weren’t tendered.  Then the stock began to sink.  By the time I realized that I didn’t want to be a long term holder of NCI I was only able to sell out at $19.50 per share.  I lost $111.68 on that trade for being stupid.  If I had been smart, I would not have made my tender offer conditional and I would have lost a lot less.

Now that I’ve gotten all that bad news out of the way, I have some excellent results to report about my investment in the Halliburton Co. (HAL) split-off of KBR Inc. (KBR).  As you might remember, I bought 99 shares of Halliburton on March 13, 2007 for a total of $3,174.95.  I opted to convert these shares to KBR shares in the split-off tender offer made at the time.  On April 16th, I received 157 KBR shares for my Halliburton shares.  I decided to hold on to this position for a bit since it seemed that the market was mispricing KBR.  Sure enough, KBR shares climbed from the low twenties to a high of $36.  I placed a stop order at $31 to lock in my gains.  Last week when the market tumbled, my shares were sold for $30.90.  The total proceeds from that sale were $4,843.80 after commissions.  I had a net gain of $1,643.85 (adjust for a $25 tender fee).  That’s a 51.8% return on my original investment!  Given that it only took 135 days to earn this return, this comes out to a 139% average annualized rate of return for my Halliburton to KBR split-off investment.  I can’t wait to find my next split-off opportunity.

If you too are looking for the next split-off opportunity, consider joining Fat Pitch Financials Contributor’s Corner.  At Contributor’s Corner you will have access to the latest trades and holdings of the Special Situations Real Money Port.  You’ll also have access to the latest going private transactions, odd-lot tender offers, spinoffs, and other special situation opportunities.  The members of Contributor’s Corner are very active in the forum where the discussion even includes more traditional value plays in microcaps and Graham net-net stocks.  Contributor’s Corner is so active because I reward members with 3 additional days of credit on their subscriptions for the latest updates on special situation opportunities.  I’m amazed at how fast members of Contributor’s Corner report on changes and updates to special situation opportunities.  It’s hard to beat the collective research of this motivated group for such a reasonable price.

There were tender offers that appeared as plain as day.  It was clearer than crystal that tender offers could provide investors with opportunities. So I set forth with investments in Tribune Co. (TRB) and Navigant Consulting (NCI).

It was May 1, 2007. Sam Zell was offering cash for shares of Tribune Company, so I bought 99 shares for $32.76 per share.  The tender offer was set for $34.00 per share up to 126 million shares.  As you might have guessed by the number of shares I bought, odd lots (lots held by owners of less than 100 shares) would not be prorated if the offer was oversubscribed.  The result of this little transaction was beautiful.

On June 8, 2007, I found that $3,341.00 in cash had arrived in the Special Situations Real Money Port.  That was a net return of $90.81, which is a return of 2.8% after expenses.  That might look like a rather meager return, but it actually is a 26% average annualized rate of return since the transaction only took 39 days.  That’s right in line with the Special Situations Real Money Port internal rate of return.

The second tender offer began on May 10, 2007 when I purchased 85 shares of Navigant Consulting for $20.65.  I only bought 85 shares because thankfully I ran out of cash in the Special Situations Real Money Port.  Normally, I would have bought 99 shares for a tender offer with an odd lot preference in order to maximize my return. 

The Navigant Consulting tender offer was a modified “Dutch auction” with a price range from $22.50 to $19.50 per share. I usually try to avoid buying into tender offers when shares are trading significantly above the lower end of the tender price range.  However, I figured that I would be safe if I made my tender conditional on the offer being above $20.75.  I’ve observed that stocks tend to go up after tender offers are completed so I figured I would be safe if my tender was not accepted due to the condition I added.

Well, Mr. Market had other plans.  The market took are rather big tumble right before the June 7th expiration date for the tender offer.  The tender offer ended up significantly oversubscribed.  Everyone wanted to be cashed out of NCI it appeared.  The final tender offer ended up being for $20.50 so my shares were not accepted.  At the end, Navigant Consulting accepted for purchase 10,623,624 shares of its common stock at a purchase price of $20.50 per share.  Since the tender price was below my conditional offer, my shares were not cashed out.

Then something strange happened.  The price of Navigant Consulting shares plunged to $20.36 on June 8th and it is now trading around $20.  As of June 19th, I’m down 3.7% or $64.75 on this trade. 

This unexpected result for the Navigant Consulting tender offer caused quite a stir at Fat Pitch Financials Contributor’s Corner.  Shareholders could have gotten a better sale price just about anytime during the month of May.  This transaction was for 19% of outstanding shares, which is a larger than average tender offer.  Some members speculated that the resulting low offer was caused by the announced earnings that came in below trend just before the tender offer announcement.  Others thought that all the liquidity in the market is just looking for relatively safe opportunities like tender offers.  Are hedge funds and private equity now invading and overwhelming tender offers?  Maybe it was just folks ducking for cover as the market looked like it was starting a tumble. Join Contributor’s Corner if you want to jump into this conversation.

Two tenders, two very different outcomes.  One was for a large-cap company and for fixed price.  The other tender offer involved a mid-cap company and the offer involved a price range to be determined by a modified Dutch auction.  One was profitable and the other was not.  At the end, it was a wash.

It will be interesting to see how the next few tender offers work out.  It might be time for me to move back to focusing on going private transactions, but maybe this really does not mean anything given the results of the Tribune tender offer.  What do you think?

Geoff Gannon also discusses some analysis of this development by Value Discipline and adds some of his own analysis.  It will be interesting to see how this all plays out, especially since now that I’m invested in Engelhard.  It’s also really cool to see the value investing blog community come together to provide in depth coverage of this opportunity.

Odd-lot tender offers provide small individual investors a unique opportunity that the big boys don’t have.  By owning less than 99 shares of the stock that is being tendered, my shares received preference in this tender offer since there was an odd-lot provision to the tender.  The AutoNation Inc tender was very oversubscribed and most shareholders that tendered their AutoNation shares only had 26 percent of their shares cashed out.  However, since I had an odd lot, my tender was not subject to being prorated.  This presented a very nice opportunity.

Let me show how nice.  I purchased 95 shares on March 31, 2006 for a total cost of $2,056.10.  This morning I received $23 per share for a total of $2,160.00.  My broker charged me a $25 dollar fee in addition since this tender was a voluntary action.  My total profit was $103.90 or a 5.1 percent gain.  That comes out to a 92 percent average annualized return for this 20 day investment!

If you are interested in future odd-lot opportunities, you might consider supporting Fat Pitch Financials and become a member of Fat Pitch Financials Contributor’s Corner.  I post odd-lot tender offers, going private transactions, and other special situation opportunities on that section of this site that requires membership access.

AutoNation has a tender offer out to purchase shares for $23.00 per share on a pro rated basis up to 50,000,000 shares.  Odd-lot holders (less than 99 shares) will be preferentially cashed out.  This is my first odd-lot tender offer, so I will be tracking it closely and writing up all my findings when the transaction is completed.

Tender offers refer to when a company or outside investor offers to directly buy a large block of stock from current stockholders at a given price or price range by a certain date.  Odd lot tender offers refer to the particular situation when the company gives preference to shareholders owning less than 100 shares.  This insures that all your shares are tendered even when the tender offer is oversubscribed, meaning that more shares are being tendered than the buyer wants to buy.  Non odd lot shareholders have their shares tendered on a prorated basis in an oversubscribed situation.

Back to AutoNation, I put in an order for 99 shares with a limit order of $21.85 before I headed off to work on Monday.  I shared this trade with my subscribers yesterday, but I thought since this is a new experience for me that I should share it here with you as well.  If you are interested, there is still plenty of time to get in on this deal. AutoNation even closed today lower at $21.79.

Let me briefly describe the details of this transaction. AutoNation (AN) is buying back up to 50 million shares for $23 a share. This tender offer expires on April 12. Odd lot owners will not be prorated. Odd lots will receive preference when being cashed out. I recommend that you review the SEC filing for the details. At $21.85, I plan making a potential gain of 5.3% before commissions and fees.

I normally would have bought this stock in my model portfolio, but that account is out of cash. Instead, I bought these 99 shares in my Roth IRA. Since this stock is my first odd lot tender offer, I will be watching it very closely and reporting my experience here at Fat Pitch Financials.

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