Tuesday, July 10, 2007

Why I bought BNS Holding

Yesterday, I bought less than 200 shares of BNS Holding for $12 a share. On July 19, shareholders will vote on a proposal to pay out $13.62 for partial shares in a 200:1 reverse split. Since there is a definitive proxy and since insiders control about 44% of the shares, the odds are very high that this transaction will go through. I put the odds at 95%. Since the shares traded at $12 a share just before the announcement, I'm getting a free option on the going-private transaction. My calculations based on the Kelly Criterion show that it would be rational to risk 93% of my funds on this investment. The worst case (a 5% chase the company falls to $0 instead of $12) would still be worth a 50% bet. By any standard, this is a good risk.

Thinking back on it now, I realize that I was a bit harsh on myself for buying Kaiser Group Holdings earlier this year. My arbitrage spreadsheet shows I estimated there to be a 75% the going-private transaction would occur. My purchase price implied a 14% chance. 75% was clearly too high in hindsight, but I still think 14% was a bit too low. Maybe 25 or 30% would have been accurate. In any case, the investment was well worth the minimal risk based on the Kelly Criterion. With relatively low odds and a high potential reward, I think I actually made a good decision even though I didn't get the desired outcome.


highlowbrow said...

It looks to me like you will need to take shares out of street name. From the press release "stockholders holding their shares in street name would retain the same number of shares they held immediately prior to the Reverse/Forward Stock Split."


Jon Ericson said...

I just posted an update about the issue above.