Sometimes (previous examples: FRE, FNM, GM, CIT) people are still happy to overpay for shares in some companies, particularly those that have fallen by a large amount. They sometimes forget that even if a stock has fallen by 90% or more, it can still fall by more than 90% again.
http://www.bloomberg.com/apps/news?pid=conewsstory&tkr=PCBC:US&sid=ahybWjXv5rhI Terms of the deal call for Ford to buy 225 million shares at 20 cents each, and pay $1,000 each for 455,000 preferred shares that can convert to common. The U.S. Treasury Department would also have to agree to take a loss by swapping a stake valued at $180.6 million held by the Troubled Asset Relief Program for common shares at 20 cents each. Common shareholders would get a chance to buy more shares at that price in a rights offering. The Treasury would be left with a 7 percent stake and common shareholders with 2 percent, not counting the rights offering.
I just do not believe that there are so many naive investors to buy at $2 if the true value is $0.2. Individual investor to compete institutional investors? no way. So I guess institutions are manipulating the price at $2 level. What you guys think?
I used to think the same, "ie, surely there can't be so many naive investors overpaying for this piece of junk". But then I saw so-called "investors" paying $5 or more for FRE and FNM in the months leading up to their quasi-nationalisation. Then I saw so-called "investors" paying well over $1.50 for GM in the days leading up to its bankruptcy. Then I saw so-called "investors" paying well over $1.00 for CIT in the days leading up to its bankruptcy. In these situations, the companies mentioned had market capitalisations of well above $200 million. Whereas PCBC has a market cap of less than $110 million, so this makes it easier for over enthusiastic shareholders to keep the share price above $2.00 *** The short answer is, "yes, I do believe there are many naive investors willing to buy above $2, even though there is a huge capital raising planned at $0.20."
http://online.wsj.com/article/SB100...4234333774.html?mod=WSJ_Markets_section_Deals Financier Gerald Ford Strikes Deal to Buy Pacific Capital By PETER LATTMAN After two years of scouring the country for a sickly bank to buy, Texas billionaire Gerald Ford has finally landed one. The investor, who made his fortune buying distressed lenders during the savings-and-loan crisis, agreed to invest $500 million in Pacific Capital Bancorp, a Santa Barbara, Calif.-based lender operating 46 branches under five brands, including Santa Barbara Bank & Trust and South Valley National Bank. Under the terms of the deal, which requires shareholder approval, Mr. Ford will acquire a 91% stake in Pacific Capital and two board seats. Shareholders get virtually wiped out, but are being given a right to buy Pacific Capital stock at 20 cents a share, the same price at which Mr. Ford would acquire his shares. The company's shares, which trade on the Nasdaq Stock Market, plummeted 47% on Thursday. But they still trade nearly 11 times their purported value, at $2.19. The deal also needs approval from the Treasury Department, which in 2008 invested $181 million in Pacific Capital from its Troubled Asset Relief Program funds. The government would have to swap its TARP investment for common stock at 20 cents a share, leaving it with a 7% stake and a roughly $145 million loss. A Pacific Capital spokesman declined to comment. A Treasury spokeswoman declined to comment. Pacific Capital, with $7.4 billion in assets, has a balance sheet saddled with soured commercial and residential real-estate loans along the Central coast of California. Mr. Ford's offer was "the best alternative available to us to assure the company's future," said the bank's chairman, Edward Birch, in a statement. The 65-year-old Mr. Ford earned his stripes during 1980s S&L crisis. Along with New York financier Ronald Perleman he acquired five failed Texas thrifts, turned them around, and eventually merged them into Golden State Bancorp. Citigroup acquired Golden State in 2002 for $5.3 billion. That deal gave Mr. Ford the wherewithal to go on a shopping spree during this financial crisis. In November 2008, U.S. regulators granted him license to buy a bank when they granted his investment group a "shelf" national bank charter normally reserved for institutions. This allowed Mr. Ford to get around restrictions that prohibit any one private investor from owning a bank. Mr. Ford has bid on several lenders over the past 18 months, including Newport Beach, Calif.-based Downey Financial Corp., which was ultimately sold to U.S. Bancorp, and Texas's Guaranty Bank, which was sold to Spanish bank Banco Bilbao Vizcaya Argentaria SA. Though private-equity firms have played a role in capitalizing struggling U.S. banksâincluding high-profile acquisitions of California's IndyMac Bank and Florida's BankUnitedâthe volume of deals has been less than anticipated. The Federal Deposit Insurance Corp., which has taken over 222 banks since early 2008, has sold far more failed institutions to other banks than it has to private-equity firms, in part due to the agency's wariness of these investors. Also, the market rally over the past year has made it difficult for private-equity firms to compete against larger, now-healthier banks in bidding for these assets. For example, seven Chicago-area banks seized by the FDIC last week were all sold to larger banks. Private-equity firms are also wary of rescue financings like Mr. Ford's investment in Pacific Bancorp. The deal brings to mind TPG's $1.35 billion investment two years ago in Washington Mutual, which was wiped out after the FDIC seized the Seattle thrift and sold it to J.P. Morgan Chase & Co. "No doubt there's a lot of risk in this deal," Mr. Ford said. "We need to be right about the assessment of the loan portfolio."
I did not see any risk on him. People are still buying at $2 and he pay $0.2. Government is screening out most of the investors and benefit a small group. In addition, they are screwing small investors.
I think it's reasonable to assume that if and when the Ford investment is finalised, the share price will be closer to 20 cents than $2. I think it's also reasonable to assume that Ford did not do the deal to flip the stock for a quick gain, but rather to extract whatever value he can from the company, with his 91% stake. It may be possible to flip some or all of the 225 million new shares (225 million * 0.20 = $45 million), however the majority of the investment is in the form of preferred stock (455,000 shares of preferred stock @ $1,000 per share = $455 million).
Update: at last night's close of $1.41, the company still has a pro-forma market cap of over $3.5 billion (Equivalent of 2.5 billion shares going to Ford; 2.5 billion * 1.41 = 3.525 billion) This is still incredibly high, and gives Ford a paper profit of $1.21 * 2.5 billion = $3.025 billion. Despite the decline to $1.41 I still think PCBC is ridiculously over valued and (assuming the deal goes through) that the stock will be much closer to 20 cents than $1.41.