Corporate Take-Unders

Take-Unders

When I first started investing I would hear what at first sounds strange. An investor would be mad at the fact that he/she held stock in a company that was getting taken over. You own a company and suddenly it gets taken over at a substantial premium. What’s not to like?

The reason is sometimes a company is taken-under (as opposed to a take-over). This is a somewhat rare occurrence but has actually happened to me 4 times in the past year or so. This happens when a company is bought for a slight premium or less than the current market price. A prime factor for this happening is that the acquisition is heavily forecasted ahead of time. A current possible example is the case of Time Inc.

Another way to look at the take-under problem is when a company is being purchased at a fairly steep discount to a reasonable valuation. This may be the case with Forestar Group (a company I presently own and a great portion of the reasoning behind this article). Forestar Group owns 45% of a joint venture that owns water rights on 1.4m acres of land in Texas. This was valuable to frackers to the tune of $300/acre at one point in time. T-Boone Pickens sold some rights in Texas for about $488/acre. But it is now being thrown away in a sale to Starwood Capital where they are purchasing the stock of Forestar Group largely on the basis of the value of the land development division. The company also has approximately $250m in the bank and very little debt as well as several multi-family properties that could be worth 10s or 100s of millions of dollars.

An interesting fact about Forestar is that management recently enacted a rights preservation plan with the stated purpose of preventing NOLs from losing value (NOLs could potentially be taken away if ownership changes drastically). In hindsight this looks more like a tactic to prevent a white-knight from showing up for this acquisition. The rights preservation plan was strangely timed in the sense that it could have been implemented several years ago.

Appraisal Rights

A strategy for dealing with companies you own being low-balled is to exercise your appraisal rights. The company is appraised by a judicial proceeding or independent appraiser with the value then being conferred to the investor.

I have basically only heard about this process theoretically and have not done this myself but may in the future.

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