I often receive emails from readers with questions about particular companies. As in the past, I try to investigate all of the companies and ideas that are sent to me and provide feedback. If explicitly requested, I will not publish my response, though I do like to publish something for others to comment on as well. If you have a company that appears to be a value opportunity and want my take on it, contact me here.
In the last few months, I have written here and here about Contingent Value Rights (CVR) that were issued by Celgene Corp when it purchased Abraxis. A reader recently emailed to ask what a CVR is, and how they can lead to value opportunities. Here is my answer:
In most cases, CVRs act as a sweetener in a transaction, by which the acquiror seemingly increases the value of its bid by attaching CVRs for the target’s shareholders. The CVR only pays off then certain targets are met. These targets are different metrics that the acquiror values in the transaction, so the acquiror is happy to offer these because they only pay off if the transaction is successful from the acquiror’s perspective. Otherwise, they have zero cost.
They may become cheap relative to their intrinsic values due essentially to massive selling (forced and otherwise) after the transaction closes. For institutional shareholders, holding CVRs might not be in their mandate, so they are forced to sell. Alternatively, for some shareholders, they simply don’t understand the CVR or don’t care to learn about it (they are a tiny portion of the transaction size) so they sell after the transaction in order to get the cash up front. The selling depresses the price of the CVRs, making them potentially great value opportunities. If you do your research, you might be able to get a great bargain.
If you are interested in this sort of thing, I suggest picking up a copy of Joel Greenblatt’s You Can Be a Stock Market Genius. It contains an excellent discussion of special situations and the opportunities they create.
I am always interested to hear about value opportunities related to CVRs or other merger securities, so let me know if you see a potentially attractive opportunity!
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