The acquisition of MANDA holding Harvest Energy Trust (HTE) by the Korean National Oil Company was completed as planned on 12/22/09 at the offering price of $10 per unit. I wasn’t able to participate in the last dividend payout as I purchased the shares later than the record date. However, the trade netted over 7% even without the dividend.

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Since inception, the portfolio has returned 6% with a win/loss ratio of 86%.

Portfolio Note: No new additions will be made to this portfolio and current open positions will be held until the close of their mergers. I’m closing this fund because I feel that it has served its purpose of providing a low-risk, positive return considering the disastrous financial climate of the past year and a half. But as one door (or fund) closes, another one opens, and I’m looking forward to opening a new portfolio commensurate with the current market climate.

Here’s recent news and notes concerning my mergers and acquisitions arbitrage fund, MANDA.

Recent completions
Natural gas master limited partnership Hiland Limited Partners (HLND) was acquired on December 4 by Howard Hamm. Originally, the deal price was set at $7.75 in cash per HLND share but it was upped to $10 on October 27, possibly in relation to pending lawsuits opposing the acquisition. This represents a 35% gain on the trade—not too shabby!

Lion Holdings completed its acquisition of Life Sciences Research (LSR) just before Thanksgiving (11/24) for the originally offered $8.50 per share in cash. This trade netted over 6% in the portfolio.

New addition
Today, Apollo Global Management made an offer of $11.50 per share for amusement park operator Cedar Fair (FUN—gotta love the stock symbol!). Cedar Fair is a limited partnership that traded as near $12 last summer and as high as $30 in 2007. Naturally, this sparked a unitholder lawsuit and I’m thinking that the bid could possibly be revised up to $12, but even if it isn’t the company will still pay out at least one of its quarterly dividends in February before the deal closes as projected early in the second quarter of next year. I picked up the stock today at $11.20 per share.

Overall MANDA performance
The portfolio is up almost 6% since inception. No, it’s not a terrific return but considering that many well-managed funds lost 30% and upwards last year, any positive return is a cause for celebration. Out of the 21 closed positions, only 3 were losers, and that, too, ain’t a bad stat.

The revised portfolio holdings are given at the end of the article.

The future of the MANDA portfolio
Looking forward to next year, I may close this fund. My reasons are two-fold: One is that I was doing this to provide my readers with a conservative investment scheme that they could easily replicate themselves and which would hopefully supply a positive return during this past recessionary market. I think I have accomplished this goal and now that the recession may be drawing to a close, I feel that there are other investment methodologies that will easily outperform this one.

The second reason is that even though this fund was fun for me to manage, I, too, am looking forward to expanding my horizons, moving into other areas and developing new products. I’m also thinking of starting another fund that would be reader interactive; for the moment, though, it’s just a thought, but who knows, so stay tuned!

Notes on other M&A arbitrage funds
There are several M&A arbitrage funds out there along with a new one, the IQ ARB Merger Arbitrage ETF (symbol: MNA), that began trading on the ARCX in the middle of October. One big difference between my MANDA fund and these others is that to make it easy for you home-gamers to follow and implement, I restricted my holdings to cash deals, although in the interests of full disclosure I did have one that involved cash and a stock swap.

In some of these other funds, stock swap trades are frequently used. The problem with this type of deal is that if the acquiring company’s stock drops in value, so does the value of the stock of the company that is being acquired resulting in an overall loss for the investor. To hedge against this scenario, most managers typically will buy put options on the acquiring company at the time when the stock of the company being acquired is bought. This locks in the arbitrage amount (the difference between the buy price and the final settlement price at deal close).

I avoided adding this type of play because in order to realize the maximum gain, one needs to be a fairly savvy options trader. Options do carry risk so in that respect alone, I didn’t think it would be appropriate for the average home investor, especially considering that the MANDA portfolio was designed to be a low-risk methodology.

Trading Notes: If you’re interested in using put options to protect a stock-swap arbitrage, I’d like to offer a couple of suggestions:
1.Buy deep in the money puts to maximize your delta. Note that this expenditure will eat into your working capital!
2.Buy puts with expiration dates a few months after the expected deal close (if you can). Sometimes deal close dates can be extended due to unforeseen lawsuits and regulatory issues, to name the most common causes.
3.Watch implied volatility on your put options as that can eat into your profit.

The EU expressed objections earlier this morning to Oracle’s takeover bid for Sun Microsystems (JAVA) citing anti-trust concerns over its MySQL database.  Not willing to take any further risk, I sold the entire position in my M&A portfolio (MANDA) this morning for $8.25/share.  This represents a loss of 9.3%.  Bummer.

Note to Larry Ellison:  Maybe if you had treated the EU members to a cruise of the Mediterranean on your luxurious 450 foot yacht you wouldn’t be having this problem!

A couple of quick updates on the status of my M&A portfolio:

1. AT&T finally completed its acquistion of Centennial Communications (CYCL) at the offered price of $8.50. Regulatory roadblocks pushed back the expected Q2 close but those hurdles were eventually resolved through divestiture of some Southern state assets. The trade represents a 9% return on the portfolio’s investment.

2. On October 29, a shareholder lawsuit forced the board of Rubio’s restaurants (RUBO) to reject an $8 per share offer from private equity. I knew the perils of this when I purchased the stock (see 10/15 blog).  I was fooled and exited the position on October 30 at $7.48 for a 1% loss. The good news is that it’s a small loss and only the second loss (out of 18) in the portfolio.

3. Starent Networks (STAR) stock is rising today (currently $33.95) but if it backs off of current levels, I’ll be looking to add it to the portfolio. Cisco (CSCO) is offering $35 per share for the company.

4. I picked up some Harvest Energy (HTE) today at $9.31/share. The Canadian oil trust announced on 10/22/09 that the Korean National Oil Corporation offered $10 per HTE share. The deal has the blessing of the board and seeks shareholder approval at a special meeting to be held on Dec. 15. Pending approval, the deal is expected to close Dec. 22. (I wish I had bought it at Friday’s low of $9.13!)

The revised MANDA holding are shown in the table below.

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Two additions to MANDA, my M&A portfolio, were made this week. The first was yesterday’s purchase of Sinoenergy (SNEN) for $1.81. On Monday, private equity made a cash offer for the company amounting to $1.90 per share. No closing date was given.

Today I picked up Rubio’s Restaurants (RUBO) for $7.55 a share after a private equity group offered $8 in an unsolicited bid. The board is considering the offer and although this deal is by no means close to being locked in, I do think that Rubio’s stands a good chance to sell at the $8 price or possibly better.

To perform their fiduciary duty to the shareholders, the board must consider this proposal since it represents a 33% increase over the $6 recent share price. However, I think that if they agree to this offer, they’re going to be slapped with shareholder lawsuits since the price of the stock was trading over $8 before 2008. The board seems to be stuck between a rock and a hard place but this time I believe the shareholders will be the ones to come out ahead.

As an aside, I was tempted to purchase Starent Networks (STAR) but seeing that the closing date could be a good six months from now, I decided that the reward wasn’t worth it at these levels. If Starent stock falls under $33.60, then it will be worth my while. (Cisco (CSCO) bid $35/share for Starent on Tuesday.)

New MANDA addition
In reviewing open M&A deals, I discovered that Life Sciences Research (LSR) was trading at a nice discount to its proposed purchase price of $8.50 in cash per share. I picked some up today for the MANDA portfolio for $8.00 per share. Assuming the deal is consummated (and there hasn’t been any indication that it won’t, at least so far), my transaction will yield a nice 6.25% profit. The company’s CEO announced on July 9th that he intended to take the company private. The deal is expected to close sometime in the fourth quarter and is subject to shareholder approval and certain closing conditions as set forth in the merger agreement.

Other MANDA non-news
As the old saying goes, “No news is good news” but sometimes no news isn’t good news as seems to be the case with Oracle’s (ORCL) bid for Sun Microsystems (JAVA). The merger finally cleared US anti-trust review and now sits under European inspection where regulators seem to not be in any sort of rush to clear it. Each day that passes is one more day the company loses market share to competitors.

And investors know it.  Witness  the steady decline in the price of JAVA stock. It closed today at $8.96, off 56 cents from its $9.50 take-over offer. I’m not too worried about the deal falling through–yet, but everyday it languishes in regulatory purgatory is one more strike against it. I’m setting a stop/loss around $8.50 which is roughly 7% below my purchase price of $9.10.

Here is the updated MANDA portfolio:

The continuing AT&T/CYCL Soap-Opera
The planned acquisition of Centennial Communications (CYCL) by AT&T (T)  is being extended. According to the companies, AT&T is still in discussion with the Department of Justice (DOJ) for regulatory approval of the acquisition. The deal was announced in November 2008 whereby Centennial shareholders would get $8.50 per share in cash. Shareholders approved the deal in February. AT&T said the two companies remain committed to closing the deal as soon as possible.

Believe what you want, but I’m still holding my shares in the MANDA Fund. If you can take AT&T at its word, then buying in today would be a good thing. I do think they really want this company but if the DOJ gives them a major hassle, they could drop their offer and play the waiting game.

In other news, I haven’t made any new M&A acquisitions because there has been nothing worth the while. Most of the recent offerings have involved stock swaps and I’m loathe to invest in them until closing time when there’s a reasonable chance of guessing the direction of the stock of the acquiring company.

En Pointe Technologies (ENPT) was acquired at the end of trading last Friday, August 7. The transaction returned 13.6% in the MANDA Portfolio, my M&A arbitrage fund. Presently, there are only four open portfolio positions with no pending purchases at this time. Recent M&A activity has been anything but robust, and the few deals that have been announced have been either stock swaps which are outside of my risk tolerance or else they were cash offerings where the arbitrage opportunities were too minimal to be bothered with.

As it stands so far, the portfolio has returned over 5% since inception a little over a year ago and boasts a win/loss ratio of 15 out of 16.

Website news
First of all, Dr. Kris wishes to thank Professor Pat for taking up the slack last week while I was on vacation. His two articles on the effect of adding gold to a diversified portfolio and his other article on the difference between compounded and average returns are not to be missed, especially for you long-term investors.

The second order of business is that the interviews I did at the Los Angeles Trader’s Expo last month are available for viewing. I did four short interviews and they are listed as links below the Blue Plate Specials on the right. Just so you know, Dr. Kris does not photograph well at all and looks infinitely better in person.

MANDA Portfolio Updates
The last trading day for Nova Chemicals (NCX) was July 6th. It was successfully acquired by Abu Dhabi’s state-owned International Petroleum Investment Company at $6 per share. The updated portfolio table reflecting this change is given below.

On July 8, AT&T (T) announced that it expects its acquisition of Centennial Communications (CYCL) to close in the third quarter instead of the second. The deal still needs the seal of approval from regulatory agencies.

No changes have been made to this portfolio since 6/2 but I haven’t posted the entire portfolio in a while.  Note that there’s only five open positions. 

Wish there was more M& A activity!

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