The Puget Energy (PSD) merger has finally been approved on December 30, 2008. After more than a year since I first got wind of this deal, the entire deal is expected to close in 2 weeks for $30 cash. Surprisingly, PSD is still trading at a discount to its final closing price. It is currently at $27.50. This still leaves room for a 9% gain with all uncertainty eliminated.
Regarding my last post on PSD, let’s take a step back and review what happened, how I went about doing things, what went right and what went wrong.
Here is a list of what was involved in my due diligence of PSD (a reference for new readers and future mergers):
A. Before purchasing any shares the important thing is that the conditions and state of the merger satisfies the following checklist. Also see this post to get started if interested in mergers.
- Due diligence by all parties
- Financing and regulator approval
- Get preliminary shareholder sentiment (or controlling shareholder approval)
- Obtain regulator (SEC, FCC, any and all) approval
- Get final shareholder approval at a meeting called for that purpose
- Insiders continually vesting or buying shares
B. Throughout the past 3 months of following the deal closely, I have been keeping up to date with all filings submitted by PSD to the SEC via RSS.
C. Read each annual report and quarterly report since the merger announcement to see whether there were any changes in the verbiage. Also read the proxy and other documents to understand the structure of the deal. This was a cash deal so it was straightforward.
D. I also spoke directly with investor relations of PSD and got the impression that she was not worried about the deal at all.
E. Documented my reasoning and thoughts so that I had something to refer back to and remind myself if the price went down and I started getting emotional.
F. Went to the Washington UTC website and quickly browsed and read the concluding statements of the filing documents of involved parties. This part was what helped me drown out noise, stay focused and to draw up conclusions and scenarios.
G. Assign odds to the merger. If you don’t know what the odds of winning are, don’t even consider playing.
What Went Right
I must say that I was lucky with this deal. Lucky because utility merger approvals are very unpredictable with lots of opposition, lucky because Washington State has a history or killing deals at the last minute, lucky because the markets ignored the facts and depressed the prices heavily in our favor.
It was also a good thing that this deal was in my backyard and I had knowledge of the geography and makeup of the state and its affairs. Had PSD been in another state, my level of uncertainty would have been much higher. So if a merger is announced in your home state, always be sure to keep your eye on it. This is where you have home court advantage, something Wall Street will never know.
Wall Street not knowing = fear and uncertainty in the markets = good chance to pick up deals.
Add to that the buyer being an Australian company I was familiar with and it made the perfect arbitrage for me in 2008.
What Went Wrong
I had originally assumed the merger would take a week or so to close but I was completely off on this part. It ended up being 2-1/2 months. Although the upside gain more than compensated for the time, the period in which cash was held up was far too long and led me to miss out on better buying opportunities of Schnitzer Steel (SCHN) (up 100%) and Hansen (HANS) (up 40%) which I had on my watch list.
What I will do differently next time is to think about the min and max timeframe for completion just as we think about the min and max value of a company.
Back in September I had bought shares, and just after the crash I sold it all while still ahead because I wanted to buy something else that got hammered.
Eventually the price went lower to its pre-merger levels and I bought again, more this time. A couple weeks later, it went down to 10% below my purchase price on no news and I could sense people and some readers getting nervous. I doubled down at this point by selling my worst ideas. I didn’t want to make the same mistake I made with the Aquila merger by not investing enough to leave a decent profit after fees and taxes.
Puget Energy Coverage Closed at Old School Value
I am glad to say that on the last trading day of 2008, the announcement has lifted my sagging portfolio to a reasonable finish. The arbitrage helped keep my portfolio steady during the wild volatility as well as adding a nice return to my performance without having to speculate.
With 2009 expected to be worse than what we are going through now, I expect mergers to slow down further and fail more often. My decision to be involved in one merger at a time and focus on details has turned out to be safe and I will stick to this in the future.
Disclosure: I own shares of PSD at time of writing