Why I Just Made Montage Technology Group My Largest Short Position

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 |  About: Montage Technology Group Limited (MONT)
by: Whitney Tilson

This morning's announcement by Montage Technology Group (NASDAQ:MONT) that it is being acquired, and the resulting run-up in its stock, has made this one of the best shorts I've ever seen, so I added to my position this morning.

I first shorted Montage late last year in the high teens when I concluded that a majority of its sales were either fictional or illegal - and I'm even more certain of it today - for reasons that have been well covered by the excellent reports by Aristides Capital and Gravity Research on this site and elsewhere.

Then in March of this year, Montage announced that a non-binding proposal to acquire the company for $21.50 in cash was made by "Shanghai Pudong Science and Technology Investment Co., Ltd. ("PDSTI"), a wholly state-owned limited liability company directly under Pudong New Area government of Shanghai."

The stock traded up to almost the bid and I figured PDSTI would soon figure out the truth about Montage and walk, so I didn't cover my short position.

Then, this morning Montage issued a press release announcing that it had entered into a "definitive merger agreement under which PDSTI will acquire all of the outstanding Ordinary Shares of Montage for US$22.60 per Ordinary Share."

In light of this, am I wrong in my conclusion about Montage? I don't think so. In fact, after reading Aristides Capital's latest report, which coincidentally was also released this morning, I'm more certain than ever.

But then why is PDSTI going through with the deal? Of course they've read the Gravity and Aristides reports, so are they really that clueless? I think not. Rather, my best guess is that this is a well-orchestrated scam to defraud the government of Shanghai, which is the sole investor in PDSTI. It's really pretty simple: the guys running PDSTI are conspiring with the guys running Montage to pay $693 million for a company that's maybe worth $100 million - and then they share the excess proceeds of $593 million among themselves and the shareholders. I can't prove this of course - it's only speculation, but it's what makes the most sense to me. If you think this sounds far-fetched, you don't know China very well. Using government money to vastly overpay for acquisitions is a very common scam.

That said, this is China so the deal still might go through - I'd estimate that there's a 50% chance that it does. But a lot can happen between now and when the deal actually closes (estimated at 12/1). Among other things, Montage is in the midst of an internal self-audit for fraud and also is in arrears in filing its 2013 annual financials, so my best estimate is that there's a 50% chance that PSDTI walks.

This morning, the stock has traded up nearly 10% to $21.50, so am I covering and throwing in the towel? Heck no - I added to my position as this is now one of the best shorts I've ever seen. If the deal goes through at $22.60, my loss is a mere 5% - and if it breaks, the upside is 50-100%. Now that's the kind of risk-reward I like!

Disclosure: The author is short MONT. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.