Dan Loeb and other holders of preferred shares were planning to force Jeffrey H. Smulyan to sweeten the deal significantly for them while keeping the deal unchanged for common stockholders. If they prevailed, then their shorts in Emmis common stock would appreciate only a few percentage points but their preferred shares (ticker:EMMSP) would gain at least 30% or so. So, they would come out ahead. If their offer is turned down by Smulyan, then they would proceed to block the buyout. In this case, Emmis’ common stock would probably fall at least 50%, going back to pre-announcement levels. Preferred shares would also go back to their pre-announcement levels, declining by about 30%. This means Dan Loeb would again come out ahead. Whatever the outcome, Daniel Loeb would stand to make at least 20% from this deal.
So what happened? The negotiations with Smulyan went on for a few months but they couldn’t reach a deal, so the buyout was cancelled. Emmis’ common stock declined to $0.78 by the end of September, a loss of around 65%. The preferred shares declined to $16 by the end of September, a loss of 27%. Daniel Loeb probably made about 40 percent from this riskless undertaking. A small investor couldn’t do this. Dan Loeb’s size enabled him to exploit the weakness in Smulyan’s buyout proposal.
Even though a small investor couldn’t do what Loeb did, they could still have imitated Loeb’s transactions. These opportunities don’t come every day, but when they do investors should take advantage of them. We will be covering hedge funds’ 13D and 13G filings more frequently, so that small investors can educate themselves about investing like a hedge fund pro. We also started sharing hedge funds’ 13F portfolios for free on our website. This is still a work-in-progress, so we will be adding more functionality in the next few weeks to make the filings more useful for you..."
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