Zabera Demonstrates Uncertainty in Small-Micro Cap Risk Arbitrage

Recent Merger Developments

It’s been a while since I last wrote about any special situation.

But in case you haven’t noticed, merger and acquisition activity has been steadily increasing.

Disney (DIS) recently bid for Marvel, Kraft (KFT) got rejected by Cadbury (CBY) and the deadline for AT&T (T) to acquire Centennial Communications (CYCL) is approaching.

So those are the big guns flexing some muscle and most likely to go through.

AT&T still have to get an approval from the FCC, though, which is one of the biggest hurdles and there is still a 7% spread with AT&T and CYCL. The deal was announced back in Nov. of 2008 which also means that many people have forgotten about it while new names have cropped up in the media. This may become a buying opportunity if the spread remains even after FCC approval.

Smaller Special Situation Plays

I was involved in a going private transaction with Zabera Systems (ZRBA) where the management of the company voluntarily opted to delist the company due to high costs in maintaining its compliance with the SEC.

ZRBA is a micro cap with a market value of $9.5m with virtually no trading volume, so it made sense for the company to delist.

What the company proposed was to reduce the number of stockholders by 1-for-250, reverse splitting the shares outstanding. Then for any shareholders that hold less than 1 share of ZRBA after the reverse split, the company would pay out in cash $5.20 in cash per share for the number of pre-split shares held.

To put it simply, all I would have to do is buy 249 shares of ZRBA, which will become 99.6% of 1 share which entitles me to receive 249 x $5.20=$1294.80.

Sadly, the company came out Thursday saying they’ve changed their minds.

Obviously this is another form of risk arbitrage. In this case, the risk wasn’t the ability of the company to obtain financing. Go through their financial statements and you’ll see that they were capable of going through with the de-registration.

The risk is that small companies tend to change their minds more regularly.

So while the opportunity and profit of small-micro cap risk arbitrage is only viable for small investors, there is higher uncertainty in how management will pursue their intended course of action.

Luckily I managed to sell and came out with a tiny $12.95 profit. Need to thank ZRBA for giving me a free lunch at least.

Disclosure: none

Comments

[sticktoitiv...:]

It isn't often enough that we have someone cover special situations.

Sep 11 05:54 PM

[Super Stock...:]

This week has been great. Our stocks up over 12%. Again we want to thank Seeking Alpha for there great service. Thank you.

Walter--

etf.typepad.com/blog/

Stock Timer

Sep 11 06:05 PM

[Yo-yo:]

Jae - you should have read why they are not delisting - first an unsolicited offer was made at $5.50, which was rebuffed and then this last announcement reference looking at other strategic options (read takeover?). The shares have popped 25%. A takeover is just as good an arbitrage exit ...

Sep 12 10:54 PM

[Jae Jun:]

Yo Yo but that is old news. They made the decision to delist by rejecting that offer. Now they come back and say they are looking at alternatives.

Still a good chance that they could reject another offer and do something else.

On Sep 12 10:54 PM Yo-yo wrote:

> Jae - you should have read why they are not delisting - first an
> unsolicited offer was made at $5.50, which was rebuffed and then
> this last announcement reference looking at other strategic options
> (read takeover?). The shares have popped 25%. A takeover is just
> as good an arbitrage exit ...

Sep 13 04:10 PM