Risky Investment After looking this over and being prompted by the 40 cent takeover for a stock that was trading below 7 cents, I have decided to wait it out , as the uncertainties of the deal closing is too risk.
1.The takoever is just a letter of intent and not a formal offer
2. the offer is non-binding on both parties
3.there is no certainty that a formal offer will follow or that the deal will close
4.it does not state how the offer will be paid..cash or share exchange or both
5.The business is heavy in debt and costing about $6.5 million in negative cash flows per month or about $25 million per year. It has not cash position and is covering off its cash flows by borrowing from the banks ( $18.5 million borrowed so far in 2011 against $19.5 million in outgoing cash flows. Bankruptcy looms in a quarter or two in my opinion.
5.net book value is just $25 million or about
.13 per share. Why would it receive a $40 million takeover offer 3 times at a premium to its book and take responsibiliuty for all that debt when it is on the verge of bankruptcy. The suitor only needs to wait a few month and the business can be bought for a few cents on the dollar.
That this deal is announced late in December when investment funds are sprucing up their year-end profiles suggests that those funds who owned the stock can now make their year-end investment look a lot better if they can sell at 25 cents rather than 7 cents.
Note also the most of the options are below 30 cents which might be another incentive.
This is just my considered opinion and my conclusions about the offer could be wrong.
But, if I right, I could lose every cent of my investment, had I invested.