I sold my PN position in June when the buyout offer first came in; but since my short ride in it was so wild, I kept an eye on the news and share price. Never considered re-opening a position–just curious to see how the story would end.
The movement we’ve seen over the past month, culminating in this week’s big announcement strikes me as pretty weird, to use a technical term. [Skip to the bottom line** now, unless you’re still invested or curious like me.]
Our story begins: A growing, recently IPOed company’s stock price tanked precipitously from Dec 2015 through Feb 2016 on no disastrous news or apparent rational reason. Then from a low of $3.56 in early March, its price almost tripled over the next month, also on no real news or apparent rational reason. Come to find out, some debtholders got “paid” (a vast oversimplification, but that was the effect) on a particular convertible (I think) debt vehicle, based on a low-water mark within a defined timeframe. So, it appears to the rest of us, those creditors intentionally depressed the stock price to maximize their payout and gain. And because PN is so small, so thinly traded and so hard to get good information on, they were successful in beating “the market” that way. Bravo to them (assuming it was legal, and I have no idea if it was or wasn’t) and to those lucky enough to buy in near the bottom. Tough luck for anyone who bought in at any point prior ($10+ or even $15+).
From Apr to early Jun, PN hit almost $9 before trimming its fast gains down to the $7s. Then on Jun 15, BOOM, PN gets an unsolicited (I think) buyout offer from EBIX, at $9.50 per share. The trading price spiked to just under $9.50 that day, then closed a little under $9. Very common in a proposed acquisition for the share price to rapidly move to a little under the proposed price, to account for the possibility the acquisition will not consummate. In a simple weighted average equation,
Trading price = p*(acquisition price) + (1-p)*(PN’s intrinsic value if not acquired)
…which will always be lower than $9.50 as long as the probability (p) of acquisition is less than 1 (which is reasonable) and the intrinsic value is less than the proposed acquisition price (also reasonable, since the price closed under $7 the day before the announcement). A long, frustrating (for those still holding their shares) period of silence, “clean room” due diligence and small stock volatility followed. The share price fell under $8, apparently reflecting decreased confidence that the acquisition would occur (a totally reasonable assumption).
On Aug 1, PN reported that EBIX increased their offer to $475M. Yes, it was odd and frustrating to try to interpret two different offers using two different units, without a reliable way of reconciling the two. Some Saul’s Board posters gave it a shot, and posted their results. But PN’s “Special Committee” did report that the new offer was a “material increase” over the original $9.50 per share offer. So the stock price immediately jumped to $9.50, which still felt reasonable, going back to our simple math:
Trading price = p*(acquisition price, which we now knew was something “materially” more than $9.50) + (1-p)*(PN’s intrinsic value if not acquired)
So the market’s reaction seemed to be, we don’t know exactly what we’ll get per share in an acquisition, but we know it should be more than $9.50, so I’m willing to pay $9.50 per share today, knowing there’s still a chance the acquisition won’t go through. This is basic expected value stuff that both sophisticated and unsophisticated investors perform all the time, intentionally or not. The share price climbed a little higher, over the next week, seeming to reflect either increased optimism about the acquisition price or the remote possibility of a bidding war–probably both. All still reasonable.
Mix in a roundly disappointing Q2 earnings report on 8/15 (with little meaningful news on the pending offer), and the stock price naturally started to trend down, reflecting a lower expected probability of acquisition and/or a lower intrinsic non-acquisition value.
BUT then it went down a little too far. Starting in mid-Oct, the bottom dropped out. Three variables from our simple math equation could have been at play: 1) decreasing probability of the acquisition, 2) decreasing acquisition price (if EBIX was uncovering weakness in their due diligence), and 3) decreasing intrinsic value of PN if not acquired.
Let’s look at how those variables interact:
As the silence grew longer, investors certainly started assuming the probability of acquisition was decreasing. But as it did, the weight of PN’s non-acquisition value would correspondingly (and necessarily) increase.
Could EBIX be negotiating a lower offer price because of things uncovered in their due diligence? If so, then the probability of acquisition should seemingly decrease also, swinging even more weight to the non-acquisition value of our simple equation. Could it really be so bad (and/or could the CEO really be that preoccupied with other interests) that the probability of acquisition stayed high, even as the offer price might be falling??? As fast as PN was dropping, nothing was out of the question.
If/as the perception grew that the acquisition could fall apart, more and more weight was, by definition, being placed on the value of PN if it wasn’t acquired by EBIX. And since little news about the health of the business was coming out, investors had to rely on the disappointing previous earning report and anything else they gleaned from the state of the market/industry. This HAD to be decreasing in investors’ minds, for the math to still work in our weighted average equation, given the falling price of PN shares.
But all was eventually revealed when PN announced this week they were rejecting the EBIX offer. Instantly, the first half of the weighted average equation disappeared. Without the probability of an EBIX acquisition, the share price must now reflect solely investors’ collective estimate of PN’s intrinsic value (which inherently includes, of course, the possibility of a future successful acquisition). And what did we see happen? …
A 21% increase!!! Huh? A 30% pop in the price when the acquisition was announced–meaning the acquisition was worth more than the standalone company; then a 20% pop when it was declined, meaning the standalone company was worth a lot more than the possibility of acquisition??? Not impossible, but something doesn’t feel right here. The only way that math works is if the potential acquisition price SIGNIFICANTLY dropped, but it still had a high probability of being accepted.
I doubt that’s what happened. And we don’t have to know what exactly transpired to know that the share price dropped low … too low … irrationally low … only to pop as soon as the public announcement was made. Is it coincidence or rational that PN closed after the rejection announcement at almost EXACTLY the same price (only $.02 off) as it closed right before the June announcement? It’s almost as if investors said yesterday that PN was now worth exactly what it was worth before EBIX made the offer–that’s not TOO crazy of an assumption, actually … but it does make the drop that preceded the decline announcement even MORE irrational.
Another possibility is that this is all just noise in the system–random statistical variation. Typical small company volatility, combined with low information and even lower rationality. Stranger things have happened.
Make your own decision. But given the unabashed manipulation we recently witnessed in PN, I’m not giving them any benefit of the doubt. I suspect insider knowledge (either within the involved companies or their consultants/advisers/debtholders) led some to again artificially depress the stock price in advance of the public announcement.
**Bottom Line: For such a small company, so thinly traded, with opaque and asymmetric information and a recent history of pretty brazen price manipulation by insiders (either or both of debtholders and actual company insiders), BUYER BE-FREAKING-WARE. PN could still be a great company with a bright future. You could still make some money trading in and out of it … but you are effectively blindfolded while the non-blindfolded run circles around you, seeming to play this as a game. They’re probably going to win; I just hope that doesn’t mean any of you will lose.
They call me,