- Digital Media Solutions is up 55% and more this morning
- There’s a cash bid for the company at higher than the current price
- Is the probability worth the potential profit?
The Digital Media Solutions (NYSE: DMS) stock price is up 58% premarket this morning. That follows an 8% price rise just before the bell last night. The reason is that there’s been a non-binding offer for the outstanding equity in the firm. The question for us – having already missed that bounce – is whether there’s a profit there still to be had. The answer being that yes, there’s at least a potential one, but it comes with some risk. For the offer is at considerably above that current market price – but it is, so far at least, a non-binding offer.
Unlike several recent takeover offers the current gap is large enough to make it a possible speculation. The thing we’ve got to recall is that inflation is at the 8 and 10% level currently. Therefore we’ve got to make more than that to be making a real – as opposed to a nominal – profit. So, thinking of a speculation concerning a takeover. Say, that recent Rio Tinto improved bid for Turquoise Hill. The gap there between the cash bid price and the current market price is only just enough to stand still with inflation over the likely time to completion. Add in taxes and that’s a loss therefore, not a profit – even if there is that nominal profit to be had.
As to what DMS does it runs a performance marketing service in the US. This needs a little unpicking, as “performance” in this sense means paid by results. That is, much more of a payment per click advertising service than a payment per view – the way that Facebook and, largely, Google make their money. That the system is so entirely different is of course why there’s still room in that marketplace where network effects are so important.
The specifics of the deal on offer are a cash bid at $2.50 a share. This is from the private interests of the current CEO and the COO. There’s always something of a problem with a management buyout. Clearly, the insiders have more information than we out here do. So judging whether the incumbent management is paying a full price is difficult. It’s also difficult for other bidders to enter the fray for that same reason.
However, here, with Digital Media, matters are a little simpler. The offer being made is 95% above the prevailing price before it. But the stock price has only risen some 65% or so since the offer was made. That means there’s still a price gap between the offer and the market price. Currently that’s bout $0.45, forty five cents. On a $2 stock that’s 20% and more, near 25% – that’s very much more than any inflation or interest charges in the timespan to possible completion. There’s thus a profit there for the taking.
However, it is still a non-binding bid. So there’s no certainty to it happening in the end. Our calculation has to be whether the probability is high enough to make that 20% attractive.