HSBC invest direct recently announced a delisting offer – see here. Ninad has analyzed this deal extensively on his blog (see here and the detailed analysis here). In a nutshell, the company was selling at around 280 per share and as one of the major shareholders had acquired the shares at around the same price, there was a high probability of the delisting price being above this price if the delisting is successful.
This opportunity appeared to have decent odds of making money – in other words the risk reward analysis showed a decent upside in a short period of time although with a real possibility of a loss. I am not repeating the analysis here as it has been done very well on ninad’s blog.
If you are thinking - is there is any original thinking here? You are on the right track – none! I am purely riding ninad’s coattails here :). I have been working with ninad, arpit and few others on various ideas and it has been quite a learning experience for me.
There is a typical price action in a delisting scenario. There is a sudden price jump as soon as the delisting is announced. One has to then analyze the deal and figure out the probability of the delisting being successful and the price at which it will happen. This is a subjective assessment and requires the analysis of several factors as illustrated in ninad’s post. The most crucial aspect is also to evaluate the downside risk.
Once the assessment has been done, the next key step is to start building a position. Typically a few days after the deal announcement, the price may start to drift downwards which is when one can start building a position.
Once the delisting is announced, one has to track the reverse bookbuilding process and monitor the price at which the shares are being tendered. Typically if the tender price is higher than the pre-book building price, the stock price will start moving upwards.
One has to then make a decision on whether to hold on till the end of the book building process or exit at a moderate gain. I typically exit at a moderate gain. If however the tender price at which most of the shares are being is around your purchase price or lower, one should exit as soon as possible.
So how did this short term arbitrage turn out? Fairly well and actually far better than expected.
I created a small position at an average price of around 283 per share and exited completely by Friday at an average price of around 325 for an average gain of 15% in a matter of 15 days.
The price has now jumped to 360+ as the majority of the shares till now have been tendered at 400. The delisting may or may not happen at this price as it depends on the management of the company. I have however exited my position as I was looking at moderate returns and did not want to risk losing money if the median price is not accepted by the management.
For starters, identify smart people and coattail them :)
Arbitrage is a fairly profitable activity, especially in a stagnant or down market. It however requires a different mindset - an ability to analyze the deal quickly, take a position and be ready to exit or cut losses at the earliest. It is crucial to manage emotions – both greed and fear as it easy to get carried away.
If you are analyzing a deal or following it and would like to share it or discuss with me, please drop me an email on firstname.lastname@example.org with subject line – ‘Spl situation’. I will be glad to share my analysis, if am doing it or analyze the deal otherwise and share my thoughts with you. You can be assured that the discussion would remain private.