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Predicting mergers is a tricky business. And as everyone knows, most merger rumors never happen. Too often, people recklessly speculate as to merger possibilities, and get laden with shares that depreciate because the merger never happens. That is why the ideal stock to purchase in anticipation of a merger is an undervalued stock. This way, in case the merger never happens, the investor still has something of value.

Vestin Realty Mortgage (NASDAQ:VRTA), however, is both undervalued and in the process of merging with Vestin Realty Mortgage II Inc (NASDAQ:VRTB). The best of both worlds. Fortunately for anyone in it, most people haven't heard of VRTA, making it the quietest merger on Wall Street.

VRTA, pre-merger, is undervalued on its own two feet. The underlying value of the business, in that it has significant cash which it is going to put to work, gives it a true value of between $2.30 to $3 a share based on a pure liquidation basis - depending on how much of a discount you give to their mortgage portfolio. This is based on a liquidation value of $14.66 million, and with 6.34 million shares outstanding. The $2.30+ value of VRTA is for an ongoing basis, but after reducing expenses post-merger, the value will only go up more.

In regard to the merger, there is some hard evidence of late that Realty Mortgage I Inc is going to merge with VRTB. Here are a few reasons why:

1. VRTA 10-Q (page 29):

Special Committee - The Board of Directors of the Company has appointed a special committee to evaluate and negotiate a potential stock for stock merger with Vestin Realty Mortgage II, Inc. The compensation that is being paid to the special committee is $17,500, plus $750 per meeting.

We are currently exploring the possibility of a stock for stock merger with VRM II. A special committee of our board of directors, consisting solely of independent directors, has been appointed to evaluate and negotiate the potential merger. The special committee has engaged independent financial and legal advisors to assist in this process. Any such proposed merger would be subject to the approval of our shareholders as well as the shareholders of VRM II.

Simply put, a small cap company wouldn't be spending money on forming the commission as well as additional money for each meeting if the merger talks were unfounded. This is hard evidence of an impending merger.

2. VRTA is now a tiny company and does the exact same business as VRTB. Merging would cut costs tremendously. Together, they will have saved $276,000 a year in management fees, which, for a company of this little size, is a huge saving. This is similar, though on a much smaller scale, to when Sirius (NASDAQ:SIRI) merged with XM Radio - both companies were losing money; why not combine the two and save money and cut overhead costs? The only difference between these mergers is that Wall Street was paying attention to Sirius. Vestin, not as much.

3. The CEO recently bought a lot of both VRTA and VRTB. He has reached his ownership maximum in each based on the takeover protection clause. The CEO's shares, all 616,002 of them, constitute roughly 10% of the company. Vestin owns roughly 10% as well. Additionally, in a 10 month period in 2011, 78,000 shares were repurchased. All signs point toward value and a possible merger.

4. The final hint at an imminent merger is the biggest as well as the most recent. Vestin filed an amendment to its bylaws with the SEC on March 28th. In the amendments, Vestin officially announced that it will no longer be recognized as a real estate investment trust, and that the restrictions on transfer and ownership will cease to be in effect, (thereby making a merger more fluid and likely).

Ceasing to be recognized as a REIT means one thing: "the restrictions on transfer and ownership of shares set forth in Article VII of the Company's charter ceased to be in effect and, accordingly, shares of the Company's stock will no longer be subject to such restrictions." Why does Vestin no longer want to be subject to such restrictions? Why do they no longer want to be recognized as a REIT, like Resource Capital Corp (NYSE:RSO)? The answer is obvious: to complete the merger! VRTA can now be a seamless addition to VRTB, sans REIT status.

Even more promising, Vestin announced that it has amended is stockholders' rights plan to provide that any stockholder may now own up to 20% of the company's outstanding shares of common stock. And if that's not enough, the final clause of their amendment allows the CEO to own up to 35% of the company's outstanding shares of common stock (A 25% increase over his current 10% ownership).

There has been little volume of late. This does not worry me because it simply means that few people realize that this stock is severely undervalued. When merger talk heats up, VRTA should begin to climb on its own merit.

Additionally, it is no secret that when a CEO starts buying up shares, people take notice. It reminds me of a similar situation to Starwood Property Trust (NYSE:STWD), in which CEO Richard Bronson purchased 15,000 shares at $20.70 on March 5th and volume jumped. Though this purchase could have simply been for the $1.76 per share dividend. Colony Financial Inc (NYSE:CLNY) had the opposite problem: On March 19th, 6 senior officers sold a combined 33,320 shares at $17.02. The stock, though, is now at $17.25.

Obviously, there are some fair risks at hand. Due to its illiquid nature and low market capitalization, stocks like VRTA are ripe for manipulation. I am not worried about liquidity though, mostly because when the merger is announced, volume will not be a problem. Additionally, the new laws allowing more purchasing by the CEO and others should keep volume at least minimally healthy. In regard to manipulation, any small cap stock has this problem, but after following this stock for some time, I have not noticed anything irregular and have enough confidence in it to purchase shares.

One interesting, final caveat comes from the following announcement, which states that VRTB, along with its CEO, is creating a new real estate fund. Since VRTB does not dilute its shareholders, this means that I, a VRTA (or VRTB) shareholder, will own a portion of a real estate company for essentially nothing. Think about that - a free percentage of a real estate company? I'll take that any day of the week.

It seems clear to me that all of the recent events surrounding Vestin are simply paving the way for an imminent merger. The fact that this has yet to reflect itself in the share price is simply because people do not know about Vestin. It is a small stock with under a $7 million market cap and only 6.34 million shares. That is why now is an opportune time to jump in. That the shares are more easily transferable (from VRTA to VRTB), as well as the allowing of the CEO to now purchase an additional 25% of common stock means that the merger is not only significantly easier with fewer hurdles, but more likely and much sooner than we think. Regardless, VRTA shares are undervalued on their own merit, and when the merger happens, the value should actualize to possibly two or three times the current value.

Source: Vestin Realty Mortgage: The Least Talked-About Merger On Wall Street