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Dudley Baker

Dudley Baker

Dudley Pierce Baker is the founder and editor of Common Stock Warrants and its predecessor, Precious Metals Warrants and a 1967 graduate of St. Mary’s…

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Are Mergers a Good Deal for Investors?

This article is not intended to rattle the sabers of attorneys but to merely reflect our observations of two of the most recent announced mergers in the mining industry; Cambior and Bema Gold.

Recently, Iamgold announced a merger with Cambior (which was completed yesterday) in a stock exchange and now Kinross has announced a merger with Bema Gold.

Our observation as an investor may be at odds with some in the investment community but have you followed the prices of these companies?

Maybe with a long-term view, these mergers will make sense for the average investor, but short-term, we don't see it. We are in a bull market are we not? Both of these stocks would have or should have appreciated substantially in value on their own merits, IMO. So one would have to question the trend that has started, with the takeover company being taken out at such a low price.

How low of a price? Let's look at a long-term price chart of both Cambior and Bema Gold. Both of these stocks traded at much higher prices way back in 1996 and we were in a bear market rally in gold.

Cambior

In the daily chart you will see that Cambior hit a high of about $4.75 cdn back in April. On the news of the merger with Iamgold it spiked briefly to less than $4.50 and has traded down to $3.80 and only now is rising back above $4. Great timing for a merger?

On the long-term chart of Cambior you will see a high of $35 in 1987, a high of about $23 in 1994 and a high of around $22 in 1996.

Bema Gold

Now looking at the above charts of Bema Gold, we see that Bema was selling for about $7 in early May this year and had another spike to about $6.75 in August. Even with the merger announcement with Kinross on November 6th, the stock only 'spiked' to around $6. How can this be a good deal for current shareholders?

Look at the long-term chart on Bema with the stock hitting a high around $13 in 1996.

Where was gold trading back in 1996, take a look at this chart and you will see that gold was trading at just over $400 in early 1996 and remember this was a rally in a bear market.

Yes we understand the arguments of the synergy of the combined companies, the cost savings and the longer term view, but, again how is this a good deal now?

Both of these mergers were stock for stock and on the news of the mergers the acquiring companies, Iamgold and Kinross dropped substantially and thus eliminated the announced 'premium' being paid or at least a substantial portion thereof. Shareholders of the takeover companies are left wondering what to do. Seems we remember when a merger or buyout was actually a good deal for the current shareholders, so what are we missing? We understand that on a long-term basis these mergers may reflect a wise decision on the part of management, but now?

As a general rule, IMO, the companies selling out/merging at this particular time in the bull market and at these low prices relative to history, both short-term and long-term, are doing so from a position of weakness rather than a position of strengthen.

Both Cambior and Bema Gold have warrants trading which will continue on and will be exercisable into shares of the acquiring companies. For those investors of the long-term warrants, they may either sell the warrant or hold and continue to participate in the growth of the combined companies. We have given our opinion to subscribers as to what they should do if they own these warrants. For those investors owning short-term call options, you are probably not so lucky.

Once again we ask, 'Are Mergers A Good Deal for Investors', maybe, maybe not!

 

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