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Friday, August 10, 2007

Reverse Stock Split Arbitrage Revisited

Several months ago, I wrote a couple of posts about some reverse stock split arbitrage plays I made. I've still been making them, but they have been a little harder to find. I've made about 6 or 7 of these trades and all have been successful except for one. That one failed because the terms of the split were altered so that small shareholders were affected instead of not being affected, which this technique relies on. In my comment here, I speculated that the terms might have been changed because the company's Board of Directors saw an unusual level of trading in their stock right before the split and suspected something was up. For that reason, I decided to stop writing about these opportunities on this blog. (Well, that and the fact that I want to keep this blog focused on real estate investing and not stock investing.)

Today, I came across an SEC filing that confirms what I suspected in that comment:

The Board's first election to reverse split the stock 100,000 to 1 with an automatic roundup to 100 shares would have accomplished the desired reconfiguration of the stockholder base, however, the announcement of the action by filing of the Company's Preliminary Information Statement caused speculation in the stock. Many speculators purchased one share in an attempt to gain entry to the reorganization. The Board contacted the OTCBB and inquired as to the possibility of stopping trading in the Company's stock, but was unable to do so. The net result of the buying by opportunistic speculators would have been to dilute the stockholder base. For this reason, Management decided to abandon the reverse split of 100,000:1.

So the companies do notice trading patterns and volumes. Furthermore, at least one company was willing to change their previously announced plans in reaction to it.

So if you are looking for these opportunities, what are you supposed to do? Well, I think the safest bet would be to wait for the definitive 14C form to be filed with the SEC. Note that the above mentioned speculation occurred after the preliminary 14C was filed. I believe, although I have not verified, that once the definitive 14C is filed, the company cannot change or cancel the actions mentioned in the filing. I should also note that I do not believe companies are required to file a preliminary copy, so some companies might not do so.

Anyway, this trading technique seems to be all over the internet if you know to look for it, so perhaps the good times are coming to an end..

3 comments:

Matt said...

Shaun,

Great blog. I think i read through 90% of your posts in the past 2 days.

I just had a question regarding reverse stock splits, what language do you look for now for stocks that may be ideal for this technique? I'm not looking for any specific leads, I have searched through some recent SEC filings so I have an idea. But have you had any recent success and if so what language in the documents assists you in targeting them?

I see a few of them that state if you own less than 100 shares you "may" have difficulty selling your shares or "may" have increased costs upon the reverse split. Not sure if this type of language is a red flag or if it is standard practice and not something to worry about. And have you had any experiences in which you bought a few shares and then it ended up costing you extra because you had so few shares?

thanks for your help.

Shaun said...

I just search for "reverse split." I should say that it appears this technique has reached the end of its life. Companies are either no longer doing this or inserting requirements that you must own at least 100 shares before the date of the filing in order to get the special treatment.

Matt said...

I figured, because I was only finding a few and they seemed to have pretty strict requirements. Oh well, thanks for the interesting reading.

I guess its back to forging my way into real estate. Keep up the good blog.

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