RSYS - Radisys

[writser]

I agree that the price action around the close looked a bit suspicious the 9th. Volume wasn't that big though. But frankly, if you see 'no reasons for this not to close' and are 'looking to add soon' yet you sell your position on a gut feeling a few days later when it is down 5% or so intraday on no news or rumours I can't help feeling a bit skeptical. Aren't these exactly the short term price adjustments you wanted to trade around? Are you sure you are not rationalizing your decision after the fact? I bought a few extra shares last week. Stock is now up ~8% from those lows. Of course, that's easy to say in hindsight and this could have worked out poorly. But that is not my point (just a brag on the side).

 

The point I'm trying to make is, of course your gut tells you to dump this crap as soon as possible when the price action doesn't look good - happened here too. And you start thinking about the horrible insiders, the major contract loss, your lack of research, etc. It feels terrible. That's what happens if you trade against the consensus. However, if you immediately yield to that feeling and sell your sub 1% position the moment it trades down a few cents, without a rationalization, then why did you buy this in the first place? Probably you were better off buying and holding some quality companies? What did you expect? That this would trade up, in a straight line, towards the deal price? If you assume every downtick on no news means an insider with better knowledge than you is selling you should a) size down your positions b) work on your mental game or c) stop buying crap.

 

The market pays you for feeling like shit. Isn't that what value investing is all about? :)

[Gregmal]

I agree that the price action around the close looked a bit suspicious the 9th. Volume wasn't that big though. But frankly, if you see 'no reasons for this not to close' and are 'looking to add soon' yet you sell your position on a gut feeling a few days later when it is down 5% or so intraday on no news or rumours I can't help feeling a bit skeptical. Aren't these exactly the short term price adjustments you wanted to trade around? Are you sure you are not rationalizing your decision after the fact? I bought a few extra shares last week. Stock is now up ~8% from those lows week. Of course, that's easy to say in hindsight and this could have worked out poorly. But that is not my point.

 

The point I'm trying to make is, of course your gut tells you to dump this crap as soon as possible when the price action doesn't look good - happened here too. And you start thinking about the horrible insiders, the major contract loss, your lack of research, etc. It feels terrible. That's what happens if you trade against the consensus. However, if you immediately yield to that feeling and sell your sub 1% position the moment it trades down a few cents then why did you buy this in the first place? Probably you were better off buying and holding some quality companies? What did you expect? That this would trade up, in a straight line, towards the deal price? If you assume every block trade is an insider with better knowledge than you you should a) size down your positions b) work on your mental game or c) stop buying crap.

 

The market pays you for feeling like you hold a bag of dog shit that is about to explode any minute. Isn't that what value investing is all about? :)

 

Perhaps my knowledge of the company worked against me. I'm not averse to price swings. Stocks like CAB, BRCD, heck even NXP were God's gift to guys like us. I'm fine going to dirty places to get returns others just don't bother with. But one of my rules for self preservation in doing so is to move quick when something doesn't feel right. Feel right is obviously debatable and different to everyone; part of what's hard to put into words. I wouldnt expect a straight line up but given the discount I also wouldn't expect 10% down swings. Pattern recognition is an indicator I use often and this one fit a pattern that raised red flags for me. I mean you could blindly just hold through everything, but then you essentially force yourself to become a bag holder if you play the game enough. I think GNW is a good example. Look at all the crap that went on there and how long it dragged out. Anyone holding from near $5 down to the 2's wasn't doing so because they were smart. They were hoping for a hail Mary. They got it. But it would have been easier just to pull the plug early on and put the capital to better use elsewhere.

 

Generally the things you describe are the avenues you take to get the extra returns in stuff like this. Maybe just personal preference but typically when I'm no longer comfortable with an investment I get rid of it. Just not worth the headache. Look at RMGN. It's not even entirely about a deal break, but all sorts of holds up and going down some rabbit hole where you needs to dedicate an unproportionate amount of time and resources. I save that stuff for the core, higher quality parts of the portfolio.

 

Here I could just be the contrarian indicator. Always possible. Rather live to fight another day than hold on and potentially end up with a company I believe to be near worthless on a standalone basis.

 

Given I started the thread I felt compelled to let everyone know I'm no longer in it and the reasoning why as best I could.

[Foreign Tuffett]

I'm still hodl-ing too. No clue caused the stock to sell off, but as writser points out it has bounced back somewhat since the definitive proxy was filed on Friday.

 

https://www.sec.gov/Archives/edgar/data/873044/000119312518246139/d502287ddefm14a.htm

 

More generally, and as I mentioned earlier in this thread, I think proper position sizing is of paramount importance in merger arbitrage situations, as the risk of significant permanent capital impairment is nearly always present. I almost always keep individual merger arbitrage positions quite small as a % of my total portfolio. Why this may not maximize risk adjusted returns, it really helps both behaviorally and psychologically.

 

Obviously individual risk tolerances vary. I think Munger put everything he had in a merger arbitrage situation in the 1960s.

[cameronfen]

When a stock with a simple story like rsys moves down significantly, I always wonder if someone smarter or with better info than me is privy to something I'm not.  With a situation like this, where the parties are neither honest or forthright, this could be a significant problem.  This is a small position for me and I hold a lot of positions and devote little time to investigate, and so I often look at price action as well to tease out if I'm wrong in lieu of more research. 

 

writeser this stratagy may not work for you, and certainly is antithetical to traditional value investing, but it works for me.  I dont know if gregmal uses a similar stratagy, but I think I would definitely question why people are selling if the thesis is so obvious. 

 

That being said, it could be lots of people selling who were down big on the stock and selling on a 100% pop on theacquisition.  .

[writser]

Sure, I agree. As I said the price action looked a bit suspicious and that's always a difficult battle: you need to have some conviction in your own assessment but you should be flexible enough to admit you are wrong at times. Maybe selling RSYS was the right thing to do last week. I was just a bit surprised because Greg seemed quite optimistic in his first few posts and then sold his entire position a few days (without news) later. I'm skeptical of trades based on 'gut feeling' or 'pattern recognition' - easy to delude yourself into thinking you are making good decisions while you are just following your emotions. But probably I overreacted. Don't take it personal.

[Gregmal]

Sure, I agree. As I said the price action looked a bit suspicious and that's always a difficult battle: you need to have some conviction in your own assessment but you should be flexible enough to admit you are wrong at times. Maybe selling RSYS was the right thing to do last week. I was just a bit surprised because Greg seemed quite optimistic in his first few posts and then sold his entire position a few days (without news) later. I'm skeptical of trades based on 'gut feeling' or 'pattern recognition' - easy to delude yourself into thinking you are making good decisions while you are just following your emotions. But probably I overreacted. Don't take it personal.

 

I think this kind of discussion is actually quite helpful. Investing is a continuous live and learn experiment with no definitive answer either way. One thing I'd add is that things did look very good. Which just further made the active selling a red flag to me. I will admit, if anything learned/reinforced, it is that adding the element of untrustworthy characters to any equation adds a huge and burdensome wrinkle to things.

[Foreign Tuffett]

This Seeking Alpha article just came out from behind a paywall today. I think it's part of the reason the stock has bounced up $0.20 off its lows.

 

https://seekingalpha.com/article/4199139-radisys-merger-arbitrage-15-percent-spread

[Foreign Tuffett]

Shareholders voted to approve the deal today:

 

https://www.marketwatch.com/press-release/radisys-shareholders-approve-proposals-related-to-planned-acquisition-by-reliance-industries-2018-09-05

[porcupine]

I wonder how much the gap will close?

[writser]

I’d be surprised if RSYS trades significantly higher tomorrow. I don’t think any shareholder was against this deal. FWIW I sold most of my shares around $1.59. An 8% spread doesn’t seem unreasonable for a cross-border deal at a huge premium that can take ~3 - 6 months, that might be scrutinized by the FTC, where the buyer is a controversial Indian business man trying to buy a small company with some financial issues, without a termination fee. What would you say is a fair discount for such a deal?

 

It’s probably still cheapish but not nearly as attractive as it was around $1.50 and lower.

[Foreign Tuffett]

I’d be surprised if RSYS trades significantly higher tomorrow. I don’t think any shareholder was against this deal. FWIW I sold most of my shares around $1.59. An 8% spread doesn’t seem unreasonable for a cross-border deal at a huge premium that can take ~3 - 6 months, that might be scrutinized by the FTC, where the buyer is a controversial Indian business man trying to buy a small company with some financial issues, without a termination fee. What would you say is a fair discount for such a deal?

 

It’s probably still cheapish but not nearly as attractive as it was around $1.50 and lower.

 

Tough to disagree with any of that.

 

The only thing I would add is that management reaffirmed in today's press release that they "expect" that the deal will close this year. Makes for a solid IRR if you have conviction the deal will close.

[writser]

It's getting tempting to buy a few shares again ..

[Foreign Tuffett]

It's getting tempting to buy a few shares again ..

 

Earnings out this morning. Transaction still "expected" to close in Q4. IMO everything appears to be on track....all about what CFIUS will do.

 

Overall, I agree that it looks good @ $1.52.

[hillfronter83]

It's getting tempting to buy a few shares again ..

 

Just in time to roll some CALL proceeds into this:) UWN is becoming interesting too without any news.

[writser]

This one looks way more risky to me though on multiple levels. I bought a few shares but still a very small position. I was afk yesterday. Managed to buy 500 extra shares of UWN.. Disappointing but fortunately I already had a decent position there.

[writser]

https://seekingalpha.com/article/4222705-radisys-reliance-merger-presents-year-end-arbitrage . Not much news but decent overview of the CFIUS hurdle.

[writser]

Yesterday there was already a bit of a suspicious run up in the shareprice and I sold half my position at 1.62 (sucker ...). Today's news during after hours: CFIUS clearance received. Looks like some market participants knew more than others. Deal expected to close on December 7. I sold the remainder of my position at $1.71. FWIW I don't mind leaving a little bit of money on the table rather than waiting for Indian receivables but selling at a ~0.6% spread was too aggressive. I got carried away a bit when the news came out and there was a nice bid at $1.71 during after hours. Mistake.

 

In general I thought this deal was a bit risky so I kept my position smallish, only started buying at a very high discount and sold my shares aggressively. Nevertheless the share price was so volatile that I managed to flip my position about three times capturing ~7% on average. Of course it is easy to say in hindsight but at a few times this really seemed mispriced. Most notably:

 

- July, 2 - Day of the announcement shares trade as low as $1.38 (a 20% discount) and as high as $1.62 (a 6% discount).

- Beginning of August - With no news and low volume shares trade as low as $1.35 on August, 8.

 

At these lows you had to make extreme assumptions about the deal not completing to justify the share price.

 

All in all this worked out great for me personally but I guess this is the type of deal that can blow up in your face every now and then. So probably not the most profitable situation a priori but got a bit lucky. Hard to judge in hindsight how risky it really was but with CFIUS risk + horrible balance sheet + somewhat sketchy buyer + huge premium at the very least it seemed risky.

[porcupine]

Congrats to all who stuck with it. Gregmal, thanks for the idea.

[Gregmal]

Glad to see this worked out for those that stayed with this.

 

 

[Foreign Tuffett]

Yesterday there was already a bit of a suspicious run up in the shareprice and I sold half my position at 1.62 (sucker ...). Today's news during after hours: CFIUS clearance received. Looks like some market participants knew more than others. Deal expected to close on December 7. I sold the remainder of my position at $1.71. FWIW I don't mind leaving a little bit of money on the table rather than waiting for Indian receivables but selling at a ~0.6% spread was too aggressive. I got carried away a bit when the news came out and there was a nice bid at $1.71 during after hours. Mistake.

 

In general I thought this deal was a bit risky so I kept my position smallish, only started buying at a very high discount and sold my shares aggressively. Nevertheless the share price was so volatile that I managed to flip my position about three times capturing ~7% on average. Of course it is easy to say in hindsight but at a few times this really seemed mispriced. Most notably:

 

- July, 2 - Day of the announcement shares trade as low as $1.38 (a 20% discount) and as high as $1.62 (a 6% discount).

- Beginning of August - With no news and low volume shares trade as low as $1.35 on August, 8.

 

At these lows you had to make extreme assumptions about the deal not completing to justify the share price.

 

All in all this worked out great for me personally but I guess this is the type of deal that can blow up in your face every now and then. So probably not the most profitable situation a priori but got a bit lucky. Hard to judge in hindsight how risky it really was but with CFIUS risk + horrible balance sheet + somewhat sketchy buyer + huge premium at the very least it seemed risky.

 

I'm consistently surprised by how much the stock prices of merger arb situations bounce around on (seemingly) no news. This situation was certainly a great example of the phenomenon.