This is happening to me, with one of my stocks right now: RCRC.
A few months ago, I bought about 50 shares of RC2 Corporation (RCRC), a maker of die-cast and wooden toys, at $20. My wife and I were looking for an investment idea based on the toys and media we’re buying for our 2-year-old son. What I’d really like to do is own Thomas the Tank Engine, but the company owning the license (HIT Entertainment) is privately owned. The best we can do is to buy the companies with contracts on the toys. RC2 makes some of the Thomas brand toys and they just received a contract to make a wooden railway set for the Chuggington brand.
Chuggington is basically Disney’s modern day version of Thomas the Tank. The show is actually pretty good, and more importantly, our son Isaac loves it. We haven’t bought many Chuggington toys however because the trains aren’t compatible with the Thomas track we already bought. Presumably, the Chuggington wooden railway toys will be. This is pretty huge, and I expect RC2 to outperform once those toys start selling this year.
Anyway, there is no real play to be made here anymore because Tomy (TYO:7867), a Japanese company that makes Transformer and Pokemon toys among others, has agreed to by RCRC for $27.90 per share… cash. RCRC has accepted, and upon new of the offer and acceptance, the stock price shot up to $28 per share, where it’s been hovering as the plans get worked out. A nice little gain for us.
So what happens now. This is a little bit different than the case of a merger or acquisition where one company may purchase the other using stock. In that case, your RCRC stock would become Tomy stock at the price of the offer. In this case, our RCRC stock will actually become cash once the deal goes through. We have a few options right now:
(1) We can sell the stock now, before the purchase goes through. If we do, we’ll pay a transaction fee and score a nice win.
(2) We can wait until the purchase goes through, and presumably our investment account with Etrade will be updated to include no RCRC or Tomy stock and instead have a cash balance of $1395 ($27.90×50) added.
(3) We could still buy more stock if we wanted to.
Why would you do #1?
Especially earlier in the week, the stock was swinging a bit, and you could sell to make a bit more than $27.90/share. The transaction fee will wipe out some of this gain but not all. You would also avoid dealing with the potential delays or hassles that could come up when the stock is converted to cash. I’ve never had this happen with Etrade before, but have had delays and odd reporting on my account for a few days in the past when a company I owned was acquired for stock. There is also a chance the deal falls through, in which case the price might fall.
Why would you do #2?
By waiting for the deal to go through, one can basically cash out without paying the transaction fee. If you think the stock price would go higher if the deal fell through, then it might be a good idea to hold on for that chance.
Why would you do #3?
It would be stupid to buy the stock for more than $27.90 if the stock was about to be converted to cash for that amount. However, if you have reason to think the deal might fall through (higher bid, etc) you might be able to get a relatively risk free chance to try that out. If you can buy say 100 shares for $28, you only stand to lose $0.10 per share ($10.00) as long as the deal goes through. If a higher bid comes in you could make much more.
I’m leaning towards 2 right now… though heavily considering just cashing out now. In this case actually, there isn’t much chance for a higher bid because RCRC management already accepted the offer. I’m not sure if they could renig now (although secretly, I’m a little sad there wasn’t some kind of bidding war).
There is a class action suit started by some share holders, who I suppose think the company is selling too cheaply. That lawsuit could hold up the deal or even stop it. At that point, you would have to consider if you think the price will go higher or lower. In the case of the offer Microsoft made Yahoo a couple years ago, I would have expected YHOO to go lower. In this case, I expect RCRC to go higher. There is a risk either way.
Let me know what you think about this particular case… or your experience with similar situations in your own portfolio.