Crawford & Company CRD-A/B Arbitrage

The stock market is one of the few places where two nearly identical goods are bought and sold for vastly different prices.  Consider the example of Crawford & Company, an insurance services provider based in Atlanta, GA.

Crawford has two classes of stock, Class A (CRD.A) and Class B (CRD.B).  The two classes share identical economic interests and similar liquidity profiles.  However, the Class A shares have no voting rights, while the Class B shares have votes, and thereby should command a premium.  How much of a premium?  According to currently quoted prices, B shares are currently 43% more expensive than A shares ($4.60 vs $3.20)!!

The biggest risk for potential arbitrageurs are

1. the possibility of this price discrepancy further expanding 
2. the timeliness of the convergence.

As the below graph shows, the current B-share premium of 43% is high by historical standards.  However, the premium exploded during the financial crisis - the possibility of Risk 1 clearly rises during periods of acute financial distress.  Interestingly, the spread pre-crisis ranged from 0-20%, while post-crisis, the spread has shifted upwards to a new range of 20-40%.

GLOI = Disaster!

Well, not 24 hrs after my estimate of $3.00-$4.00 in potential value at GLOI, (mis)management comes out on their conference call to spit in my face...

We are currently estimating that this distribution could be between the range of $23 million to $25 million with later distributions in late 2011 or early 2012 after the various earn outs are received and the last escrow payment is collected.  We would expect that any later distributions would be an aggregate amount between $0 and $23.9 million based on achievement of earn outs and releases from escrow.

Based upon these figures, I would probably anticipate somewhere around $2.50-$3.00 in future distributions.  Apparently I was not the only one who was taken a bit back by the discrepancy between some simple arithmetic, and management's more advanced financial accounting...

Eric Weinstein of Chancellor Capital spent quite a bit of time on the CC questioning the various numbers.  In my opinion, management did not seem too concerned about shareholder wealth (the warning signs were there earlier, I did not accurately discount this).

GlobalOptions Group (GLOI)

GLOI provides risk management services to the government, and operates through a variety of subsidiaries.  Recently, GLOI has sold off a number of their subsidiaries (mostly to management-related entities... hmmm).  In either case, the table shows the pro forma balance sheet after the sale of three of their four primary businesses...

In effect, the company is now in possession of roughly $21M in cash and notes receivable (plus some potential earnouts based upon contract renewal negotiations anticipated to take place in Aug-2010)... proceeds from the asset sales.  In addition, their remaining business is Bode, an industry leader in DNA forensics.  This business was purchased for $12M several years ago, and has been growing at a very rapid rate.

On August 13th, the company announced the sale of Bode (again to management related entities).  The sale price was approximately $24.5M cash (there is also potentially $5M in earnouts which I believe have very little value based upon historical Bode revenue levels).  The company no longer has any significant operations, and has announced intent to return proceeds of the sale back to shareholders.  Below, I provide my estimate of the approximate value of the current GLOI entity...

I anticipate roughly $3.17 to $4.00 in potential value in GLOI stock.  I am assuming that the assets/liabilities of GLOI still remaining at the time of the Bode sale will be transfered to the new company.  In addition, this does not take into account any potential transaction costs & tax liabilities that may arise.

The company anticipates the sale to close by Q4-2010, so I believe that we may anticipate a sizable dividend sometime in Q1 or Q2 of 2011.