Expedia Arbitrage

During these months of crisis, the market has taken a beating and most peopls's portfolios have actually been beaten down or affected without a shadow of doubt. Easily, most people might have suffered a 10% loss in the value of the portfolio due to the subprime crisis.

But if you do look hard enough, you can always find opportunities that can insulate your portfolio. For example, MCBF still remains an arbitrage play. It is currently trading at $11.90. Do refer to the link for more information

http://valueinvestorhaven.blogspot.com/search?q=mcbf

But what i would like to point to is a special situation that is probably not very much spoken about and which occurred very recently. Expedia came into our radar screen when Barry Diller the Chairman of expedia announced a 3.5 billion share buyback program. Essentially with shares outstanding of 279.33 million shares, buying back shares at a dutch auction price of between $27.5 to $29 dollars per share pushed the share prices right up as you can see from the charts above just before the middle of June. A dutch auction basically allows shareholders to tender their shares at the stated range and this will allow the company involved to buy back majority of the shares at the lower end of the rage depending on the prices which were tended. Now, this bullish announcement caused share prices to shoot right up from around $24 to $29. If all the shares were bought at $29 , a $3.5 billion buyback program allows the company to scoop up 43% of the company's shares outstanding which is an extraordinarily large amount of shares within the company. As it is, the Chairman himself Barry Diller owns around 22% of the company's shares outstanding and probably believes that expedia is grossly undervalued. This, i shall write about in my next article.

What happened next was that due to the high cost of borrowing money to fund the buyback, expedia cut their share buyback program by 80% !!!! Due to management's indecisiveness and lack of planning, the stock tanked to $25.75 in one fell swoop. Guess what? Management mistakes can prove to be pretty profitable at times. Here are the facts...

For one, the dutch auction will still take place at the stated range between $27.50 and $29. The only difference is that the share buyback program is only reduced to 20% of the original plan. To me a 10% share buyback program is still quite substantial and can prove to be a catalyst for moves to the upside.

The second factor is that since the dutch auction is still going to take place, the management is sending a clear signal to the market that the shares were worth at least $27.50 cause they were willing to buy back your shares at the minimum price of $27.50. Chances are that they would even buy it a higher price depending on the prices tendered by existing shareholders.

If you did the math, you find that if you actually bought those expedia common stock at $26 and held it, in just a month, it would have risen to $29 when the buyback took place. Today, expedia's price stands at $30. The profit is a decent 11% return($3/$26) assuming you sold out at $29. Even if you did sell out at $27.50, the profit would have been 5%($1.5/$26). Annualise those figures and you would have gotten a higher return.

One can always find opportunities like such. It is simply a matter of looking hard enough and being patient. This to me is like money from the skies, from the heavens!

Have a great day folks!

Better and better,

Lucas