Advant-e Corporation (ADVC) / Arbitrage opportunity

From the press release, Advant-e has announced that it is essentially doing a tender offer for odd lots (anything not divisible by 10,000 shares) for $0.27 a share.  As of today, ADVC was trading between 23 and 27 cents a share.  I actually got filled today at 23 cents with Interactive Brokers (I placed my order on the weekend before I knew about the press release).

Let’s get into the mechanics of the trade.  The press release states:

1-for-10,000 Reverse Stock Split followed by a 1,000-for-1 Forward Stock Split; Up to $2 Million Share Repurchase; and a Potential Special Cash Dividend

The first part is the reverse stock split.  Anything not divisible by 10,000 will be converted into cash at $0.27/share.  The combined effect of the two stock splits is a 10-for-1 reverse stock split.  So Advant-e will trade in the ballpark of $2.70.  After that, the company will likely continue to buy back its shares.  And it will distribute the rest of the excess cash to shareholders through a dividend.

The more interesting trade may be to stay long Advant-e

I think that the CEO knows what he is doing.  He wants to buy back shares because they are cheap.  Advant-e is a growing software company and deserves a growth multiple higher than the current P/E ratio of ~9.8 (at a stock price of $0.27… $18.01M market cap / $1.83M profits for last 4 quarters).  Advant-e was buying back shares in the past few years for the same reason.

In the past, the CEO has also been playing crazy games with the stock price.  In 2009, he split the stock 10-for-1.  By splitting the stock, he pretty much ensured that ADVC would stay in penny stock land for a long time and be extremely unattractive to institutional holders (they rarely buy stocks under $2.50/$5.00).  It also reset the stock price data on some stock sites like Google Finance (but not Yahoo Finance) so that people wouldn’t immediately spot the huge growth in Advant-e’s stock price.  Supposedly the stock split was to increase liquidity in the stock.  Now the CEO is undoing the earlier stock split.  All in all, I don’t think that these share price games matter that much.  Liquidity is likely to be low either way.

De-listing the stock may not be a bad idea.  One reason why I do not like microcap stocks is because the overhead of being publicly-listed is rather high.  In 2011, the company spent over $68 thousand in audit fees (this is to the external auditor… I believe the company also had to pay somebody to do the internal preparation of financial statements and all this other stuff).  Getting rid of overhead creates value.  If for example they save at least $200k after tax, it will make a meaningful difference to their $1.83M in profits.  Of course it is better to avoid that overhead in the first place… the reason why Advant-e exists is because it was one of those silly stocks trying to take advantage of the Dot-Com bubble.  The genesis of this stock is not the prettiest.  But I’m happy that this stock exists.

I also like that the CEO is smart enough to pay dividends.  In the software business, it is hard to reinvest capital because you don’t want to diworseify into new fields or to hire bad programmers.  Apple for example has great difficulty in reinvesting capital so Steve Jobs pretty much sat on the cash (Warren Buffett even gave Jobs advice to buy back shares of Apple but Jobs didn’t listen).  I really really like software companies like Computer Modelling Group (CMG.TO) that pay dividends and buy back shares when they are cheap.

Warren Buffett

In Alice Schroeder’s biography of Warren, he notes that Warren differed from his mentor when Jay Pritzker tendered for shares of Rockwood & Co.  Another blogger explains:

Rockwood & Co.; controlled by Jay Pritzker, the company was offering to exchange $36 of chocolate beans for shares trading at $34, a classic arbitrage opportunity; unlike Graham, Buffett didn’t arbitrage but instead bought 222 shares and held them, figuring Pritzker had a reason he was buying the stock, “inverting” the scenario; the stock ended up being worth $85/share, earning Buffett $13,000 vs. the $444 he would’ve received from the arbitrage

It may be a good move to continue to have shares after Advant-e’s “tender offer” closes.  For example, buy your position plus 9,900 shares on top of that (I usually try to buy in multiples of 100 because some exchanges have rules that penalize odd lots that aren’t divisible by 100… I’m not sure how Pink Sheets operate).

On the other hand, continuing to hold shares after a tender offer doesn’t always work out.  BRT Realty Trust tendered for its shares at $6.30… currently it trades slightly below that.  Nordion completed a dutch-auction tender offer at $8.50/share in 2010… it just so happens that Nordion right now is trading at US$6.74 and has cancelled its share repurchase program.  These non-arbitrage tender offer trades don’t always work out.

*Disclosure: I had a very small long position in Advant-e prior to reading the press release.  I owned the shares to see what kind of order execution I would get with IB as I wasn’t sure I would get good execution.  I sold BRT, CMG.TO, and Nordion at a profit and no longer own them.

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One thought on “Advant-e Corporation (ADVC) / Arbitrage opportunity

  1. Pingback: Advant-E (ADVC) quick update « Glenn Chan's Random Notes on Investing

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