Mergers and Acquisitions Strategy and Deep Put Option Strategies

Dec. 21, 2007 - PRLog -- Mergers and Acquisitions – A Core Strategy

A quick look at the principal and interest chart on myinvestmentlife.net shows that we can make a substantial amount of money each time we invest our cash on hand in announced mergers and corporate acquisitions of public companies.
Frequently we are able to buy shares of stock in a company after the announced buyout and earn three or four percent on our money by simply purchasing the shares and tendering the shares to the trustee handling the merger or acquisition. This approach allows us to act as if we made a three percent per year gain five or six times in one year. This is a very good way to increase our investment return. We examine all companies that have announced merger activity.
We like to get involved based on shareholder acceptance of the terms offered by the acquiring company. We then will buy the equity and tender the shares IF the completion date fits our investment parameters (several opportunities to invest in short term transactions per year).
Last year we participated and recommended two deals for direct investment of the shares. See our past websites Investorslife.org/blog1 and Investorslife.org/blog2 for our discussion of the DLP and Harrah’s Entertainment transactions.


Our Option Strategies:

Options are risky – fact.

Options are not risky – fact.

The Black-Scholes options model has seven variables. The Gastineau-Medansky model has five variables. “Variable” is a nice word for “guess.” Insert the correct variable/guesses and the model is correct. Base the model on the wrong - things like what a stock will be worth and on what date and you keep the Federal Reserve Governors up all night. Variables can simply be bad guesses in the wrong direction. Variables can be very expensive. Will interest rates rise? Yes, some time. Will rates fall? Yes, some time. When? Today is 31 October and the Fed lowered rates today. Is it permanent? Is it merely stopgap? Will the Fed need to raise rates? Or lower rates? All variables lead to assumptions and risk management should be based on principal and interest chart assumptions weighed against the risk free rate of return. (please see: our discussion of our definition of the risk free rate of return). We don’t like guesswork.We generally have two options strategies we put to good use:

1. We like to sell people puts on stocks that have been pummeled by bad news. We like to receive a great deal of money for deep puts – say a $25 put on a stock now trading at $2 per share selling for $22. We like to have people give us their money for a long period of time so we can invest that capital with our capital and make enough interest to get our cost of the shares to almost zero if the company goes broke. If the shares rise, we make all of the profit on virtually no risk to our capital - we merely lose interest and not our principal. This is one of our very favorite strategies. We have one position like this now that we explain in detail to the subscribers to our November newsletter. We think one thought that the reader might be able to use – now or as a strategy for the future - is worth the price of a subscription.

2. We sometimes purchase shares of companies that are out of favor and then on the recovery/rebound we sell calls on the shares that we own. Frequently, these calls have expired worthless to the buyer and we have kept premiums approaching the actual price we paid for the shares.

In cy1996 we purchased T2 Medical shares based on a price decline from over $60 per share to $5 per share. At $5.00 per share we purchased all available shares of the stock. We continued our buying until we had accumulated over 1% of all shares in two days. This was the bottom of the decline. We based our decision on the fact that T2 Medical had over $3.60 per share in cash, owned several blood banks, nursing homes and infusion therapy centers. The company had no debt of any sort on the balance sheet. The company fell from favor based on the illegal practice of paying physicians for patient referrals to their infusion therapy centers for kidney dialysis. This was illegal, but we guessed – not fatal. The founder who had retired returned to run the company. We sold the call options several times as the share price recovered and the company was sold to Corum Healthcare Corporation 1.5 years later. Instead of getting $12.50 per share we had sold the $7.50 call option, then the $10 call option and finally the $12.50 call option. By doing so we grossed approximately $15 per share instead of the $12.50 we would have received with a simple buy and hold strategy. We discuss our current option positions and reasoned guesses in the current issue of our newsletter.

Have a wonderful investment life.

The editors.

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My Investment Life is a publication dedicated to the proposition that financial education is best learned from those with vast experience and great success – even outsized success – over time. We posted and time dated our results at Investorslife.org/blog1 and Investorslife.org/blog2 for August 8, 2006 to August 8, 2007. Those results are up approximately 48%. This is pretax return and with no accounting for the cost of brokerage commissions or taxation. If you like last years results, sign-up and read our reasons for our current investment decisions. We offer a money back guarantee.
We have a series of articles that define our investment process and the use of actual investing tools – not the computer programs that give a buy or sell signal - but our actual reason to commit capital. We advertise and recommend the products we actually use to make investment decisions.

Website: myinvestmentlife.net