Global Sources (GSOL) – Interesting tender offer but I will watch from the sidelines

(This is not an actionable idea.)

Global Sources has announced its intention to tender for its shares at $10.00/share (press release).  The shares currently trade at $7.93, well below the tender price.  Global Sources has had two tender offers in the past.  If history repeats itself, then the tender offer will be massively oversubscribed.  Effectively, the tender offer will like a special dividend.

So why am I sitting this one out?

There are things about the company that don’t sit well with me.  Firstly, offshore money is involved.  Pump and dump schemes seem to be correlated with the use of offshore entities.  While I can’t tell you if Global Sources was originally a pump and dump, there was an offshore entity involved for most of Global Source’s history as a publicly-traded company.

On May 31, 2000 an entity called “Hung Lay Si Co. Ltd.” owned 16,035,388 shares, roughly 61.0% of shares outstanding.  The 20-F filing describes this entity:

Hung Lay Si Co Ltd. is a company organized under the laws of the Cayman Islands. It is wholly owned by the Quan Gung 1986 Trust, a trust formed under the laws of the Island of Jersey.

[…]

we do not know and may never know the identity of the beneficiaries or settlors of the Quan Gung 1986 Trust.

There are other things about Global Sources that turn me off.

  1. Lots of related party transactions.  For example, the YE2007 20-F states that the company reimbursed related parties for the use of club memberships.  The YE2002 20-F lists club memberships under “Other Assets” for YE2002 and YE2001.  Club memberships do not seem to be mentioned in other areas of the YE2002 20-F (such as the section for related party transactions).
  2. Numerous real estate deals.  While real estate consists of a large portion of Global Sources’ assets, the investor presentations do not seem to talk about them much.  There also doesn’t seem to be much information on the location of these buildings.
  3. Insiders may face few or no legal consequences if they do something that they shouldn’t do.  One of the risk factors state: “Because we are governed by Bermuda law rather than the laws of the United States, our shareholders may have more difficulty protecting their rights because of differences in the laws of the jurisdictions.”
  4. Share ownership of Merle and Hung Lay Si combined have dropped a lot since the company first became public.
  5. Investor presentations talk about non-GAAP/non-IFRS earnings where share-based compensation isn’t treated like a real expense.  This strikes me as promotional.
  6. The company’s capital allocation strategy doesn’t seem to make a lot of sense to me.  Profits from the operating business have gone towards buying real estate without any leverage.  This does not seem like a good use of shareholder capital as unleveraged real estate typically has very low rates of return.  The company’s core business seems to have wonderful economics.  The company should probably return profits to shareholders via share repurchases or dividends instead of buying real estate.

The underlying business seems to be a wonderful business.  However, I am turned off by this company’s origins and I don’t feel like playing with fire.

*Disclosure: No position.

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9 thoughts on “Global Sources (GSOL) – Interesting tender offer but I will watch from the sidelines

  1. I don’t understand – if they’ve done two successful tender offers in the past, what are you worried might happen here? Sketchy companies buy back shares all the time. Presumably you’d be waiting until shortly before the tender offer expires to buy shares. So is the worry that that company collapses completely during that period of a few days?

    • Thanks a lot for the comment!

      The real answer is that I have an aversion to investing in sketchy companies, mainly because I got burned by QXM/XING (which was a lot sketchier than this).

      2- This is not a buyback. Management will likely tender everything, which they have done in the past.

      3- There’s a chance that the tender doesn’t happen. The SEC may reject their plan. There’s a small chance that this could be a ploy to raise the share price, kind of like those fake takeovers that some Chinese reverse mergers try. (My thinking may be a little skewed because one of my bets against a fakeover worked out.)

      Supposing that the tender goes through, you are still exposed to short-term price fluctuations. It’s more like a special dividend.

      • The reality may be a little more complex. In the past, only 80-90% of shares were tendered. I don’t know why everybody didn’t tender; normally you would expect 98%+ of shares to tender. In theory the number should be close to 100%. It’s possible that the stock has a wide retail ownership base (22.3% owned by institutions) and that some retail investors simply aren’t paying attention.

        I think the tender offer slightly hurts retail investors who aren’t paying attention. I guess there is an opportunity here to make money at the expense of those people. But I feel like this situation is sketchy.

  2. Fair enough. We’ll see once the details come out, but this one might be worth doing if there’s an odd lot preference. Otherwise probably not worth the proration headache.

  3. I’m new to tender offers but this seems attractive to me if there’s an odd lot prioritization (100% conversion in ~1 month w/ 20+% returns). GSOL has done a tender offer twice before in 08 and 10 and all of the other tender offers I’ve looked at have been completed on time so completion risk appears minimal. Additionally they have the cash on hand so there’s no financing risk.

    Am I missing precedent(s) for tender offers (like this) that don’t actually happen? Can you provide any specific examples? I ask because I’m still trying to figure out if I’ll participate in this tender offer and I’m trying to realistically gauge the risk that the tender offer falls through. Thanks in advance

    • Advant-E announced a plan where they would reverse split their shares in a way that would force all of the odd lots to tender their shares at a premium to market value. The SEC did not approve that plan.

      I don’t really have a lot of experience with tender offers.

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