Posted on July 30, 2009 - by PanzerGrenadier

A Bird in the Hand is Worth Two in the Bush

Photo by Clinton Steeds

We all encounter situations like this now and then in our journey towards financial freedom.

The company of the shares you bought has been acquired by an even larger company. You can now exit at a price that gives you a premium over your average cost, i.e. you will definitely lock in some profits if you sell to the mandatory general offer by the acquirer. But other investors in the same company suggest that we should reject the general offer so that you can hold out for a higher price.

So what should you do?

The company I’m talking about is Singapore Petroleum Company Limited or SPC. PetrolChina bought over the 45.51% state held by Keppel and thus launched a mandatory general offer (in cash) to acquire the remaining shares of SPC.

I was fortunate in that I had bought SPC at prices around $6 as well as $2 so my average cost was $4 plus. Thus, the offer by PetrolChina in their mandatory offer meant that I could lock in a confirmed profit of close to $2 a share x number of shares owned.

To sell or not to sell?

Even in situations like this, some people will say, just sell since it’s a sure thing and you don’t even incur brokerage fees for selling. The fear of losing out the bird in your hand due to this unexpected but pleasant turn of events for the company you have invested in is there.

On the other hand, some investors are trying to not sell and see if the lack of supply in the shares would force the acquirer, in this case, PetrolChina to raise its price. It’s the greed part or our self-interested economic motives driving us to hold out for an even better price.

What would you do in this situtation?

Weighing the risks and the benefits

When I heard of the general offer by PetrolChina for SPC and the price of $6.25, I was happy because my average cost was lower so there was some sure gains to be made. So the question in my mind was should I hold out for an even higher price.

I discussed with friends who had invested in SPC as well as visiting forums such as the Channelnewsasia Market Talk on the topic SPC. The sentiments expressed in these various channels varied over time. At the beginning, most of the people were asking the same questions as I was, “Sell now or hold for a better price?”

As more information came out from the following sources:

• SGX announcements
• Discussions in forums about the actual offer document terms and conditions
• SPC’s first half / second quarter results (opens up PDF document)  (21 July 2009)
• Independent financial advisor’s report (opens up PDF document) as well as recommendation by the independent directors of SPC (24 July 2009)
• Views from friends who are into equity investing

After considerating the sources of information above, I’ve decided that the bird I have in my hand is worth two in the bush. Hence, I’ll be selling my stakes in SPC to PetrolChina in the general offer because of the following reasons. Read more…

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