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GSOL: Odd Lot Arbitrage Opportunity

|Includes: Global Sources Ltd. (GSOL)

Background

When companies seek to buy back a large portion of their shares outstanding (e.g., 5-25%), they often do so by making an offer to shareholders to sell their shares to the company for a specified price above where the stock had been trading. In general, the stock price immediately reacts by moving toward the price offered, but falls short of reaching it due to what is known as "proration risk" for institutional owners of the stock. This refers to the risk that if many other investors desire to participate and therefore collectively oversubscribe to the offer, there could be proration in which only a portion of each investor's shares is bought.

However, companies sometimes stipulate in their tender offers that holders of an odd lot are not subject to proration. In other words, the company agrees to give priority for these holders to participate ahead of everyone else that tenders shares. Companies do this mainly because they would often prefer to cash out small stockholders to avoid the reporting/other costs that are associated with them. Such "odd lot provisions" enable individuals to buy an odd lot and profit from tendering it to company.

GSOL Tender Offer

Global Sources (NASDAQ:GSOL) has issued a tender offer expiring July 27th to buy back ~22% of outstanding shares at $7.50, which contains a provision giving holders of less than 100 shares priority treatment. Given that shares are currently trading at less than $7, this presents an attractive opportunity to buy 99 shares and tender them to make $50 with minimal risk. Although this is small in absolute terms, if you saw a $50 bill in the street, wouldn't you pick it up? The return can also be magnified if you have multiple people in your family with brokerage accounts.

If you're interested in these types of trades stay tuned, as I plan to post more (and am putting together a dedicated website tracking them).

Caveat

Given the small size of these opportunities, it is important that you minimize transactions costs (some brokers charge high fees to participate in tender offers). My recommendation is interactive brokers, as they charge no fee to participate in tender offers, and buying 99 shares should result in a commission of just $1.

Disclosure: I am/we are long 99 SHARES OF GSOL.