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Shares of Alliance Healthcard (OTC:ALHC) are up more than 200% over the past two trading sessions on news that the company will acquire Benefit Marketing Solutions in a stock and cash deal. The combined company is expected to be one of the largest benefit discount card companies in the industry, with over 1,000,000 customers and revenues of approximately $18,000,000.

Alliance Chairman Robert Garces stated "with the increased size of Alliance it will be able to broaden its product offerings, enhance its already superior quality medical services and provide even greater value to it members and medical providers."

I think Alliance had to make a move for a different reason. According to the latest 10-K, Alliance's revenues and net income declined year-over-year, and it didn't look like a turnaround was imminent. With those kind of numbers, Alliance had to look externally for growth.

alhc

As a strategic move, the acquisition probably made sense, but the price seems a little steep. Alliance is paying $7,147,000 in notes and issuing 10,000,000 shares of stock to BMS shareholders. At today's close of $1.35 that amounts to over $20M. I have no idea what kind of earnings the combined company will put out, and perhaps it will be able to generate sufficient cash flow to justify the purchase price.

However, the 10 million shares issued to pay for BMS trouble me. I am sure there is a lockup period, but that will come to pass. When it does the market will have great difficulty absorbing that overhang. Alliance Healthcard is the single thinnest stock I have ever traded -- most days trading under 1,000 shares and many days not trading at all.

Because of this concern, I took advantage of the rally (and especially the ensuing liquidity) to unload my smallish position of just under 10,000 shares at $1.50. While it was not a grand slam, I am happy to take the profits and move on. I think there is a better than 50% chance that I will be able to repurchase the stock if I care to at last week's prices within the next twelve months.

Disclosure: I have no position in ALHC.OB.

Source: Alliance Healthcard Jumps On Acquisition; Why I Sold