Recently, Jade Technologies has been in the news for a failed takeover. In addition to the minor shareholders who suffered from the subsequent price drop, a private investment fund Omni Partners incurred huge losses as well. This was due to their failed arbitrage play.
Before we looked at that, let’s look at what arbitrage is.
Arbitrage is a term you might come across from time to time. Basically, what it means is to take advantage of certain market mis-pricing to make money. This could be due to various factors like time, risk or location.
One opportunity for doing arbitrage is when there is a takeover offer for a company. Usually, the market price of the company share will trade at a slight discount to the takeover price. For example, if there is a takeover offer of $10, the share might trade at $9.80. (There are times when the market price trades at a premium to the offer. This happens when people feel that the share price is still under-valued.)
There will be three groups of peoplet:
The main risk to the second and third group of people is the possibility of the takeover offer not going through. They also have to tie down their capital for the entire duration of the takeover.
In return for these, they get to make the additional returns.
Now, back to Jade.
Apparently, Jade’s biggest investor and bidder, Dr Anthony Soh run into trouble with his takeover offer. His Jade shares were pledged to Australian stockbroker Opes Prime, which went into receivership. As a result, Dr Soh’s shares were seized by Opes’s creditors and sold off.
Without those shares, Anthony Soh could not come up with enough financing to complete his takeover offer and had to abort it.
Omni Partners, who bought 49 million Jade Technologies shares at twenty two cents from the open market, were intending to arbitrage on that 0.5 cents spread. However, the failed takeover meant they ended up with a capital (paper) loss of about 75%.
While reading the story, I remembered there was a similar takeover offer by a certain Eddie Chng for Serial Systems a few years ago. He breached the 30% shareholdings and was forced to make an offer to the rest of the shareholders. He didn’t have enough money to complete the offer and was forced by MAS to give up his own holdings as compensation.
Personally, I feel that arbitrage play on takeover offers by individuals is a pretty risky affair. I would only consider such a strategy when the takeover party has a strong financial backing.