Friday, July 18, 2008

Introducing MANDA

Yesterday we looked at established funds whose primary focus was buying M&A target stocks just after the acquisition announcement was made. I mentioned that Mario Gabelli, the manager of the Gabelli ABC Fund, has been doing this for 15 years. Although his year-to-date return is down -3.2%, he's never ended a year in the red. The fund's ten year average is a modest 6.7% but risk is minimal and best of all, the fund does quite well in bear markets. So why am I bringing this up again?

Being in a competitive mood, I thought “Hey, why don't I give Mario a run for his money?” So, I'm going to set up my own M&A fund to see if I can outperform the big guys. But what to call it? Well, after spending about three seconds on this I decided MANDA (M and A) would suffice. It's not the most clever title but it's one that I'll (hopefully) be able to remember.

The MANDA Fund set-up
The fund will open with $100,000 in capital. Trades will be entered on the target company at the first possible moment after the announcement is made. The majority of announcements are released when the market is closed, so those trades will be executed as soon as the market opens. (According to my broker, market-on-open orders are not guaranteed to be executed at the opening price.) If the announcement is made during market hours (which rarely happens), a trade will be entered as soon as possible as I'll need a few minutes to assess the deal. I'm allowing $10 as the trading fee which includes commissions ($9.95/trade) and regulatory costs which typically amount to only a few cents. No trade will be more than $10,000 or 10% of the total portfolio value. Account interest will be included at current rates and no margin will be used. As for terms, I'll be looking primarily at cash-only deals (no stock swaps), but if there's a compelling cash plus stock swap, I'll consider that, too. Evaluation will also be based on the terms of the deal: hostile takeovers and ones fraught with financial and/or regulatory issues may not make the cut. That's about it.

The first two trades
On July 10th, Dow Chemical (DOW) announced it will be buying Rohm Haas (ROH) for $78 in cash. The deal, partly financed by Warren Buffett and the government of Kuwait (Dow just sold its plastics division to Kuwait Petroleum), is expected to close sometime in early 2009. On the date of the announcement, Rohm stock opened at $73.80. I'm picking it up today for $74. The company just raised its dividend to $0.41/share. Beginning in 2002, the company has consistently paid quarterly dividends--February, May, August, and November. If I can collect two of those at the current price, that will give me a total gain of $4.82/share for a six-month return of 6.5% or 13% annually. Pretty good. Even if Rohm fails to pay a dividend, the six-month return will still be a decent 5.4% (10.8% annual return).

My other holding is Community Bankshares (SCB) which I highlighted in my June 26 blog. I bought that for my own portfolio on that day at $18.85/share and will be adding it here at that price. The expected six-month yield (including dividends) for SCB is 12.4%.

Current portfolio and future picks
When I find a compelling takeover candidate, I'll let you know on the day that I enter a trade. Current portfolio picks will be shown in the MANDA portfolio which will be located under Portfolios in the Blog Topic section to the right (as soon as I do a little layout rearranging).

Let's see if we can beat Mr. Gabelli's ABC Fund. Go MANDA!

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