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IMOS Is At 50% Discount To Catalyst Value

ChipMOS has been through some ups and downs on merger talks. Investors have been disappointed by the slowness of management and the premiums offered. Investors have been disappointed and started ignoring the stock or reducing holdings.

However, on Jan 21, ChipMOS Bermuda and Taiwan agreed to merge with plans to finish the merger by Q3 2016

"Under the agreement, ChipMOS shareholders will receive US$3.71 in cash, without interest, and 0.9355 American Depository Shares ("ADS") representing 18.71 shares of ChipMOS Taiwan (each ADS will represent 20 new common shares, par value of NT$10 each, to be issued by ChipMOS Taiwan) in exchange for each ChipMOS common share of par value US$0.04 currently held. This would represent US$19.77 in total consideration as of January 20, 2016 and a premium of 14.7% based on the average closing prices of ChipMOS and ChipMOS Taiwan on the Nasdaq and the Taiwan Stock Exchange for the 3 trading days ending January 20, 2016 and an exchange rate of NT$33.785 to US$1.0."

To summarize - an IMOS stock holder gets
1. $3.71 in cash
2. 18.71 shares of ChipMOS Taiwan (8150:TT) = $18.14

ChipMOS Taiwan (8150:TT) currently (Feb 12) trades at 32 Taiwan Dollars ($0.97 USD). So 18.71 shares are worth $18.14

A single IMOS share should be worth $18.14+$3.71 = $21.85. It is currently trading at $14.49. This is a 50% premium. This is a significant margin of safety

The risks are
1. 8150:TT price falls . It would have fall more than 50% to lose capital
2. The exchange rate varies significantly by year end. This seems unlikely
3. The merger does not go through. This is the biggest risk . IMOS is a profitable company but recently declared a 10% YOY revenue drop. This causes the price to drop 10% as well. Another 10% drop by year-end is possible.

The downside is limited while there is significant upside. And the merger is a catalyst for Q3 2016 so the time at risk is short.

It might be possible to short 8150:TT while buying IMOS to capture the difference directly.

I have a small position in IMOS and am wondering if I should increase at these levels. I'd be interesed in any risks I've missed.

Disclosure: I am/we are long IMOS.

Additional disclosure: This is my first value identification attempt and submission to SA.