Tom Konrad, CFA
Portec Rail Products (PRPX) agreed to be acquired by L. B. Foster Company (FSTR) on February 17. At least four law firms have started class action suits against the Portec board. Here is why not to join any of them.
Portec Rail Products has been a longtime favorite of mine. It’s profitable, and delivers valuable services to the rail and rail transit industries. This article goes into a lot more detail as to why I like Portec. In large part because of the acquisition, Portec is the best performing of my Ten Clean Energy Stocks for 2010. I will be sad if the merger goes through, because I will need to find a replacement in my portfolio, although the cash will soothe the hurt nicely. L. B. Forster might be that replacement, but when I have a choice, I prefer microcap companies like Portec.
The lawsuits allege that Forster is not paying enough of a premium (4% over the closing price the day the deal was announced), and that the directors breached their fiduciary duty in not looking for other buyers: i.e. not shopping the company around more to get a higher price. One analyst of my acquaintance thinks a more reasonable premium would have added another buck per share.
But when was the deal negotiated? Almost certainly over the last month or more.
For most of January, Portec was trading around $10.50, and it started December at $9. The purchase price of $11.71 per share is an 11.5% premium over $10.50: not great, but not horrible. It’s a 17% premium over $10 per share.
But no matter what you think of the price, there’s no reason to join the lawsuit. Every dollar going to a lawyer is money that comes, eventually, out of some investor’s pocket. You probably see an ad asking you to join one of the class action lawsuits next to this article: they’re plastering them all over the internet.
If you don’t like the price, you already have a perfectly viable option. It’s called democracy. Don’t tender your shares. 65% of shareholders must tender their shares for the merger to go through. If clean energy supporters had 65% of the votes in the US Senate, we’d have climate change legislation by now.
Why has the stock risen so quickly in the last few weeks? Perhaps rumors got out about the negotiations, and people with this inside information were (illegally) buying shares to make a quick buck. Despite being illegal, that sort of thing happens all the time. The trading pattern was particularly suspicious the day before the merger was announced .
Those insiders are the people to send the lawyers after!
DISCLOSURE: Long PRPX.
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