The objective of this report is to evaluate investment opportunities for Strategic Capital Management, LLC regarding stocks of Creative Computer and/or its subsidiary firm Ubid. The analysis deduces arbitrage to be the best investment strategy.
Strategic Capital Management (SCM), LLC:
SCM is a recent entrepreneur venture founded by Elena King and two of her fellow classmates. The company has currently generated 20 million dollars and aims for annual returns of 10 percent. Its investors are charged a management fee of 2% of assets under management and an incentive fee equal to 20% of profits. Moreover company policy requires investors to keep their money invested for a minimum of two years.
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Ubid on the other hand has a fairly weak balance sheet. Although this can be attributed to the fact that it’s a new company it poses uncertainty as to whether finances will improve in future. Currently it holds cash of $500,000 and assets (excluding cash and accounts receivable) equal to around a million dollars. Accounts Payable and Advances from the Parent serve as significant liabilities and shareholders’ equity is a negative figure.
Stock Market Performance
Ubid IPO took place after the close of trading on December 3, 1998. Ubid sold 1.817 million shares for $15/share. The company received proceeds of 25.4 million after subtracting underwriting fees. The shares first traded at 38 more than double the IPO price and closed the first day at 48 (triple the amount). Currently its share price stands at $36 whereas Creative Computers is at $22.75.
Creative Computers has a market capitalization of $ 232 million (22.75 * 10,238,703 outstanding shares) whereas Ubid’s market capitalization amounts to $439 million. This indicates that Ubid currently has a greater market value than the parent company. Moreover, the mispricing can be taken advantage of through an arbitrage scheme.
After this detailed analysis we see an opportunity of arbitrage. Keeping in mind that IPOs often lead