It was announced today that BlackBerry (NASDAQ:BBRY) agreed in principle to an offer for a buyout at $9, led by Fairfax Financial, a Canadian insurance company. The $9/share deal equates to roughly $4.7 billion dollars.
Earlier this week, I continued my argument against buying BlackBerry, even after its 20% haircut on the heels of horrendous losses and massive layoffs last Friday.
Today, I'm changing my tune a little bit, and will make a short, concise argument that there's good potential for small - albeit almost guaranteed gains - by buying BlackBerry at its current price. Blackberry is currently, at 1:30PM CST, trading around $8.83, about 2% under its buyout price.
CNBC offered a short report on the buyout Monday:
BlackBerry agreed in principal Monday to be acquired by Fairfax Financial, a Canadian insurance company, for $9 a share in a deal worth $4.7 billion in US dollars.
Trading in BlackBerry was halted before the announcement. When it resumed at 2 p.m. EDT, the stock jumped as much as 5 percent before retreating slightly. Prior to the announcement shares in the troubled smartphone maker company were down more than 5 percent.
Fairfax Financial, sometimes called the Berkshire Hathaway of Canada, is a holding company whose primary business is in insurance. Fairfax is also BlackBerry's largest shareholder.
Post-Announcement Buyout Deals are Great Scalps
These "post-announcement" buyout situations, however, are anything but over once a deal has been announced. Savvy traders take advantage of these situations often, and BlackBerry has now fallen into this category.
Often, investors feel as if they have already missed the big play if they weren't in a stock before its buyout was announced. Sometimes, however, this isn't the case. There is a case to be made for making a modest gain buying directly after a company announces a buyout, as people already in the stock are at a rush to sell and potential uncertainties behind the transaction keep the price slightly lower than the bid price.
Here's an example of what I'm talking about, from Miscor's (OTC:MIGL) buyout in March of this year:
Take, for my latest example, Miscor's recent news of buyout. The news dropped before trading on Thursday 3/14/13. Integrated Electrical, the buyer, announced that the buyout would be between $1.48 and $1.57 per share.
The stock opened up over 10%, but quickly sat at $1.41. Why $1.41 if the buyout price minimum is supposed to be lower than that?
A savvy investor that I'm friends with read the news and noticed MIGL was trading at an ask of $1.41. Being the alert investor he is, he was able to pick up shares. By the end of the day on Thursday, it had closed at $1.45. If the buyout occurs at the lowest estimated price of $1.48, it's a gain of 4.96%. If it happens at the high end price of $1.57, it's a gain of 11.35%. If a bidding war starts (as happens way more often than people think) for the company, who knows how much of a profit he may have netted himself buying at $1.41.
And, earlier this year, I argued that Dell (NASDAQ:DELL) was a buy ahead of their shareholder vote while it was trading at $13.60:
Like a bettor doubling down on a bet, but laying 5 to 1 once his team is up by 5 runs in the 8th inning, the odds have stacked even further in the direction of success here. By purchasing Dell at $13.65 (current price as of 1:30PM CST), you're locking in a 2.27% gain if Dell's deal goes through (post-dividends). Not amazing, but not bad for something that's damn close to a sure thing. Funds and institutional investors are notorious for post-announcement buying, as the price usually hovers 1-2% below the buyout value and they have the firepower to make considerable money off of 2% gains.
BlackBerry has now fallen into this category, instantly changing how I feel about making a non-emotional investment into the company that is likely to yield almost guaranteed results at at least $9/share.
Scenarios for BlackBerry
BlackBerry has that same type of 2% appeal, and it actually looks more likely from the get-go (due to the fact that the agreement is "in principle" already) that Fairfax's $9 offer will go through.
Forget the fact that I think this is way more than the company is worth, and layout the potential scenarios here:
Very likely : Buyout goes through, buyers at $8.83 yield an instant 2%
Less likely : Buyout goes to auction or some type of bidding war and yields more than 2% - this is very, very cool when it happens; I assure you.
Less likely : Neither of these situations occur, Fairfax backs out, and BlackBerry sinks back to pre-announcement levels $8ish. This is where your main risk lies on this trade, but remember, you're still buying BBRY at a 20% discount to its market price last week.
On a stock that I've been bearish on over and over again, it's looking like with a $9 buyout on the table and BlackBerry trading at $8.83, there's finally a reason to pick up some shares and make a small, almost guaranteed gain. The odds are stacked much more than the market usually telegraphs for those who purchase BBRY today below its buyout price.
Sure, it's an unconventional trade, but one that this investor points out to be as close to a sure thing as possible. You need to have all different types of trades in your arsenal, just like the pros do - and post announcement buyout plays are all part of the arsenal that you need to have to find alpha - ask any fund manager.
Often, these types of trades aren't considered, so if you don't go for the trade I hope at the very least that this article opened up some perspective into trading tactics for investors. Best of luck to all investors.