Monthly Archives: June 2018

Exited Deswell Industries after six years

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Deswell Industries is one of my longest held stocks. I bought my first shares more than six years ago on March 6, 2012 and sold my position last week after reviewing the latest annual results. The company isn’t exactly expensive, but it’s not longer a net-net since NCAV is $3.13/share while the current price is $3.25/share. If we take the value of all non-operating assets, and slap a 8x multiple on last years operating earnings we get a very similar value of $3.18/share. So right now Deswell isn’t expensive, but probably fairly valued, and after more than six years I think it’s time to move on to something else. I have always been a bit hesitant to sell this stock because of the years of continues insider buying which at some point in time will probably culminate in a going private transaction. But I don’t have unlimited patience…

Deswell Industries went up 53% in the more than six years that I held the position, and while that is not bad, you would expect a mediocre annualized return. But thanks to all the dividends ($1.04/share in total!) that the company paid in the meantime the internal rate of return was actually a pretty satisfactory 15.10%. Better than I expected before I did the math for this post.

Disclosure

No position in Deswell Industries anymore

Comtrex Systems merger arbitrage

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Thanks to a blogpost of NoNameStocks I was alerted to the fact that Comtrex Systems (OTCMKTS:COMX) is being acquired by Zonal Hospitality Systems in an all-cash transaction for approximately GBP 7.46/share (~US$9.88 at the time of writing). With the stock trading at $9.43 there is a spread of 4.8% remaining which seems pretty high considering that this sounds like a low-risk deal that should close pretty fast.

    1. There are no regulatory hurdles to take.
    2. More than 50% of Comtrex shareholders have already entered in voting agreements, so stockholder approval is a formality.
    3. There shouldn’t be financing issues since Comtrex is a tiny company (~US$16 million market cap) with a significant cash balance.
    4. Comtrex is being acquired at a ~60% premium, so no crazy downside risk if the deal fails.
    5. And to top it all off: it’s a deal that at first glance seems to make sense for both companies since they are in the same business (point-of-sale stuff for the hospitality sector).

The only question mark is that the merger consideration is subject to certain adjustments, but without a merger agreement publicly available it remains a guess what those are. My guess is, and I think this is the most likely scenario, some kind of adjustment based on net working capital and net cash balance at the time of the merger. This is very common, and usually this adjustment is just as likely to result in a higher price as in a lower price. Especially since Comtrex is a solidly profitable business this is unlikely to be a large risk. It’s not some kind of melting ice cube that gets smaller and smaller while waiting for the merger to be completed. But we will have to wait for the proxy statement, which is expected to be send to shareholders in a couple of weeks, to be sure what the deal exactly is.

Disclaimer

Long COMX

Willbros Group merger completed

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Yesterday the merger of Willbros Group with Primoris Services was successfully completed. When I wrote about the merger I thought that there was little that could derail the deal, and that it would close fast, and that proved to be the case. Making a 9.1% return in two months time is as good as it gets in the merger arbitrage game.

However, just because that this deal was completed successfully doesn’t really mean that it was a good bet. I think it was, but last week I got a not so nice reminder that deals with companies that aren’t in the best financial position (like Willbros) can quickly get very ugly when things don’t go as planned. I had a position in Rosetta Genomics, a company that was flirting with bankruptcy as well before Genoptix agreed to take it over. After it (finally) managed to secure shareholder approval for the deal I thought that there was also little that could derail it, until Genoptix claimed the existence of a “Material Adverse Effect” (no details were given).

The stock has cratered since that announcement because it’s unlikely that there will be anything left for equity holders in a bankruptcy scenario. Looking back at it in hindsight I don’t think I made an error in betting on this merger, but the unfortunate reality is that there is always a small possibility of a deal failing for some unexpected reason. As long as you size your positions accordingly it shouldn’t be a problem, although it’s of course never going to be nice…

Disclamer

Long Willbros Group (since the cash payment hasn’t been received yet by my broker)