Thursday, July 19, 2007

Arbitrage Trade

Oh, the privileges of being a small investor. It is really nice that big hedge funds are too occupied with million dollar arbitrage and currency trades to capture all available arbitrage. A couple thousand is insignificant in their books, but for many small investors, a trade of that proportion could add 10% to their net worth! As my risk tolerance diminishes, I continue to look for opportunities that provide substantial returns with limited risk. One such opportunity is Monarch Community Bancorp (MCBF).


Background:
Monarch Community Bancorp specializes in... oh wait a minute... it doesn't matter what they specialize in, what matters is what they are doing with their stock. In February MCBF agreed to execute a merger transaction in an attempt to reduce their number of shareholders in order to become a private company. MCBF calculated that in order to reduce the number of individual shareholders to 300, the maximum number of shareholders of a private firm, the company would need buy out shares from investors with less than 1,000 shares, at a price of 13.50 per share. The deal is scheduled to close sometime in the fourth quarter of this year.


Required Transactions:
The trade is pretty simple for this arbitrage opportunity: go long, right now, at any quantity under 1,000 shares.


Expected Results & Risks:
The only risk involved with this trade is merger abandonment. I have no reason to believe that the deal will fall through based on my initial research on the transaction. It appears that the company is progressing nicely toward privatization. So if the deal does finalize, investors could easily snatch up almost 10% in four months!

*Disclaimer*
The writer of this article currently owns shares in Monarch Community Bancorp. Investors should always do their own individual research before executing a trade.

2 comments:

Brett said...

Hey Rick-

What's going on with MCBF? No price movement or volume over the last two days? Also, you have 10/01/07 listed as the buyback date; where did you find that date?

BTW, you've got a great blog here and good luck with your goals.

Thanks,
Brett

rmacguidwin said...

Brett,

Thanks for the comment. The trade has gone pretty well for me. I started an initial position at 12.28 and slowly accumulated shares during pullbacks. I picked up many shares below 12.00 because this stock shared several of the broader market's bad trading days. Investors did not appreciate that this stock had a fix buyout price, and should not be affected by other market actions.

I will try to post another update to this trade this month.