Emageon Deal Bombs: My Failure in Discipline

You win some, you lose some, although I’ve been losing more often than winning lately.

The Emageon (EMAG) merger did not go through as expected Wednesday and when I woke up Wednesday morning, the stock had already dropped 50% and 44% by the end of the day. My stake in EMAG is now down 42%. Talk about a sickening wild ride.

Here’s the press release.

Emageon Inc., a leader in enterprise medical information technology systems for hospitals and health care networks, announced today that it has been informed by Health Systems Solutions, Inc. (HSSO.OB) that it does not expect that Stanford International Bank Ltd. (SIBL) will provide the funding necessary to consummate the parties’ merger transaction today. The merger was scheduled to close today, February 11, 2009, in accordance with the terms of the parties’ amended merger agreement. Emageon is evaluating its options in response to this development.

Although it isn’t clear whether the deal has failed, there is no other choice but to consider it failed at this point. Right now I’m sure we feel half dead, but hope will only lead to disaster.

Tuesday, just before I left for work I put in another order at $2.64 thinking I would make a quick 10% or so with a day remaining. All publicly available information pointed to a closure. Unfortunately, we know the result.

Mistakes

Rather than assess my position and asset allocation, I got greedy and failed to minimize risk by adding to an already full position. Basically, this was a failure in discipline.

Although I know that markets are irrational, situations like Tuesday, where there was a sudden cliff-like 25% drop before making its way up again, rung some alarms but I convinced myself that I was the logical one.

Even without news, when mergers drop on huge volume, some people know things that we don’t. Ask the Image entertainment (DISK) shareholders who too have been thrashed recently. 10% drops may be a fund closing some positions but 25% is a complete unload.

I should have been happy to take my winnings. No point in trying to squeeze every last drop. Lost 42% for a 7% gain. I wrote down my odds on this blog for a reason but I didn’t refer back to it for a reality check.

What Now?

I’m not hoping. I consider the deal to be a failure and this has now become a huge setback for my 2009 portfolio. I was up 1% Tuesday YTD but it now looks like I’ll be further below the market.

The important thing is to not try and “win” my money back by speculating and taking on additional risk.

I’ll be monitoring this one closely and seeing whether future press releases clarifies the status of the merger. If the announcement is made that the deal is truly off, then my stop loss should kick in at $1.25.

Disclosure: I hold shares of EMAG at time of purchase with a stop loss at $1.25.

Comments

[User 355739:]

Don't sell youe EMAG quite yet. HSSO is owned by SIBL. SIBL post-poned the merger on Dec 29th seemingly because the market was down 35% on the year. It was arbitrarily changed to Feb 11th. Well, the market was down another 11% since Jan 1st. The deal has not been cancelled. I believe that the synergies of EMAG and HSSO make it a good merger- it is just that SIBL is not wanting to do the financing right now in this market.
DISK is up 100% on the news that Nyx aquisitions has deposited the $1.8 million for the merger.

Feb 12 10:39 AM

[Jae Jun:]

It's quite amazing how deals like DISK even manage to close. What a stroke of luck but congrats to all who bought on the dip.

On the other hand, I doubted SIBL would pay. Fool me once shame on you, fool me twice, shame on ME.

Feb 12 10:50 AM

[echojeff:]

This is very scary for me to watch. I do not have any stake in this company. I use its products every day. Its server/pacs system stores and displays our Echocardiography, Heart and Vascular cath images and data. This system works very well, and has been very stable. Its the unchanging constant in our department when the imaging equipment is not. I would hate to see this company go out.

Feb 12 11:00 AM

[trimagna3:]

On the 10th, the price abruptly dropped from $2.65. It tripped my 20pct trailing stop. I was out with a profit but not nearly the profit that I expected.

The price immediately rebounded to around $2.40. I was angry that the momentary drop caused me to lose on the previous gain and the expected gain.

The next day the deal failed. I felt like a blithering genius for using a trailing stop.

DISK is looking good.

There's still chance that Q Black will reneg ala Stanford.

What about Emageon's chances? Zero. Stanford will be banished FOREVER from all stock trading folderol.

Feb 12 07:43 PM

[Jae Jun:]

DISK? No thank you.

Feb 12 09:25 PM

[rballty:]

"It's quite amazing how deals like DISK even manage to close"
"DISK? No thank you"

Very interesting comments from someone who invested in a deal from a ponzi schemer for a measly 7%. Please explain how EMAG was a better bet than DISK. I am not sure about putting money in Disk at 2.20, but at .85 cents I was willing to capitalize on the fear. Disk just reported record numbers, increased guidance, and collaborated with their buyer on recent projects. Emag is burning through cash, and their buyer is being investigated for running a ponzi scheme. Hhhmmmmm, you must have an interesting method of analyzing risks.

Feb 13 01:19 PM

[blonde molly:]

excellent article. sorry u lost, but it's good to see someone who can admit to a mistake. that's rare anywhere now days much less in trading!

Feb 14 02:26 AM

[Jae Jun:]

@ rbalty
There is no official evidence of a Ponzi you claim. And to clarify I did not invest in SIBL.

If you read the post and not just a couple of simple comments, you would know that I got into EMAG when the spread was 50%.

Just like how you bet on disk at 85c with news that the buyer didnt pat the deposit, I bet on EMAG when the buyer deposited another additional $4m. Based on the information, I would say my bet was of less risk at the time compared to your reason for DISK.


On Feb 13 01:19 PM rballty wrote:

> "It's quite amazing how deals like DISK even manage to close"

>
> "DISK? No thank you"
>
> Very interesting comments from someone who invested in a deal from
> a ponzi schemer for a measly 7%. Please explain how EMAG was a better
> bet than DISK. I am not sure about putting money in Disk at 2.20,
> but at .85 cents I was willing to capitalize on the fear. Disk just
> reported record numbers, increased guidance, and collaborated with
> their buyer on recent projects. Emag is burning through cash, and
> their buyer is being investigated for running a ponzi scheme. Hhhmmmmm,
> you must have an interesting method of analyzing risks.

Feb 14 01:38 PM

[Jae Jun:]

@ blonde molly

As much as the loss hurts, I dont see the point in trying to make excuses and hide it. Losses happen, bad luck happens and I was on the receiving end of both.

Feb 14 01:39 PM