Saturday, November 11, 2006

Event Horizon

Mr Warren Buffett is known as a value investor who attempts to purchase, when possible, an entire business at an attractive price. However, before Berkshire Hathaway (BRKa) was synoymous with this approach, Buffett had put on trades in a manner known today in the hedge fund industry as "merger arbitrage".

The blog features a present opportunity available in the Singapore market. Aircraft equipment and avionics specialist, A-Sonic Aerospace Limited (SIN:A53) (ASON SP) has launched a takeover bid for logistics firm, Airocean Group Limited (SIN:A21) (AIR SP). A-Sonic has proposed to swap one A-Sonic share for every 2.63 Airocean shares in their bid to delist the latter. At the time of this writing, Airocean exchanged hands at $0.090 a share. This implies that shareholders in Airocean who bought in at this price are, upon successful closing of the deal, effectively purchasing A-Sonic stock at $0.24 a share. Since A-Sonic is trading at $0.28, these investors are effectively getting exposure to A-Sonic at a 17% discount.

Obviously, the trade is not a risk free one. For example, the deal may not close if insufficient shareholders vote in its favor. This may lead to a divergence in the stock prices instead. Interested investors should also study the shareholding structures of both companies to ascertain which way substantial shareholders will vote on November 13th.



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