What to do with Click Commerce shares? (CKCM, ITW)

I wrote in some detail last week that I found the Click Commerce (CKCM) takeover by Illinois Tool Works (ITW) to be both confusing and irritating, in that it seemed an odd fit and it valued the company at what I think is a significant discount.

But I didn't decide on the spur of the moment what to do with my shares. It was my inclination to sell some of them before the tender offer goes through, since the possibility, however slim, of the deal falling apart would likely depress the shares, and I can likely come up with something better to do with that money ... but I wanted to make sure there wasn't any solid likelihood of a better offer from another acquirer.

Well, I still haven't heard anything about another acquisition, and Michael Ferro has officially tendered his shares to ITW (see the SEC 13D), so if there was any doubt we know that the CEO and largest shareholder is going along willingly. The shares bumped up by a few cents today, though still under the tender offer price of $22.75, and they actually very briefly spiked over the tender offer in after hours trading to $22.80, which I assume was simply a trading error by someone and not a sign of a nefarious insider leak. The little bit of volatility that was reintroduced to the shares today, likely as a result of some sort of swirling rumour without any basis in fact, does give me a bit of pause (see the chart -- this is really the first time since the shares settled down following the announcement that the shares broke out of their 2-cent range) ...

... but just a bit.

So on Wednesday I'll plan to sell the half of my shares that are slightly leveraged and that are held in a low-commission account (I have a little bit of margin in this position), and hold the remainder ... just in case.

Here's my reasoning:

The tender offer is going to be at $22.75, but it will take some time before we reach that point. During that time, we're dealing with the time value of money and the deal risk, the playground of the arbitrageur (which I am not).

The tender offer is scheduled to begin next Monday, September 18, and to be open for a month (20 business days). During that time I could tender my shares and, most likely at some point immediately following the end of the tender period, receive my $22.75 per share payment.

If I elect not to tender my shares and the deal still gets a majority approval (which seems exceedingly likely, since I've heard no objections from the institutional owners and Ferro's 20%+ stake will go a long way toward deciding the matter), the shares would be taken from me in exchange for $22.75 when the deal closes, which is supposed to be "sometime in the fourth quarter." My guess is that it would be pretty quick, given the likely lack of regulatory complaint and the relatively smallness of the deal for Illinois Tool Works.

So the basic option is: something like $22.55 today cash in hand; $22.75 in late October assuming the tender offer remains uncountered by another bidder and isn't recalled by the acquirer; or $22.75, probably by December, if the deal goes through. Those numbers won't be changing with ITW's stock price, since it's an all cash deal.

And as I intimated earlier I might do, I'm hedging my bets. The return of less than 1% (the .20 cent difference between today's price and the tender offer) over the next five or six weeks isn't sufficient to make it worth it to take the chance that the deal could possibly collapse, or to pay even a small amount of margin interest on my holdings.

But I'm also entertaining the possibility that another bidder could always potentially materialize, however unlikely ... so for the shares that I hold without margin, and which will also be cheaper to transact if I accept the tender offer than if I sell them outright (again, this is a tiny consideration -- less than 1% impact), I'll wait for the tender offer unless I see an opportunity in the interim that requires me to free up that cash immediately.

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Another Odd and Frustrating Acquisition (CKCM, PRVD)

This is getting a little frustrating -- for the second time in less than a year, a small, promising, high-growth investment is being bought out by a large conglomerate at a bargain price ... and I own the small company, not the big one.

Last December it was Provide Commerce (PRVD) being bought by Liberty -- a little bit of an odd fit, an online flower vendor being bought by an operator of cable channels. John Malone picked up PRVD at prices well below their highs of the previous year, taking advantage of a rough summer that had depressed prices somewhat.

And today, Click Commerce (CKCM) is being acquired by Illinois Tool Works (ITW) -- again a bit of an odd fit, with the massive diversified manufacturing conglomerate picking up the small supply chain software company. It's true that both CKCM and ITW have been serial acquirers, but that's about all they have in common -- ITW is mostly known for selling welding supplies, refrigerators and ovens, and other hard, dirty businesses. They have some units that would work well with Click, such as some manufacturers of barcode readers and some packaging suppliers that could integrate well with a supply chain management software suite ... but it could also just be that it was cheaper to buy Click than to hire them to help with supply chain management for ITW's huge, diverse manufacturing and supply operations.

And just as with PRVD last year, I think the big guy is getting a bargain. CKCM has traded as high as $31 this year and as low as $13 or so a year ago, but has never been given a premium price to match its meteoric growth rate -- perhaps because no one trusts CEO Michael Ferro because of their trouble during the dot com meltdown, or because no one is sure that they'll be able to continue growing if they ever stop acquiring small software companies. Click has had its share of skeptics, but at both a forward and current PE of about 14, excellent profit margins that should be able to climb as the RFID business grows, and a tiny price/sales ratio of under 3, I think Click remains a bargain to this day.

And it looks like ITW will enjoy the bargain, and we small shareholders will be left out in the cold. It's nice to see the 25% bump for my portfolio today, but I've bought shares both above and below the buyout price so my overall profit if I tender all my shares will be just about 13% -- fine, but not as great as I would have hoped for from Click as a stand-alone concern over the coming few years. CKCM has been growing consistently and profitably for about three years, and I was hoping for more. For more about my thoughts on Click, you can see previous articles from when I bought shares at $19 in May, $25 in March, and $14 last October,

I don't see any other potential bidders lining up to throw their money at Michael Ferro, and the fact that he has apparently agreed to sell his 25% at this price means it might be tough to get any leverage on ITW or any other bidder, so I'll probably be stuck with this offer regardless of how I feel about it. I haven't seen the official deal paperwork yet, but it appears that any other bidder would just have to pay enough to make up for Click's $10 million penalty to ITW -- not all that much, actually, just over 3% of the deal amount, but there's still no reason to assume that there are other interested parties out there.

If nothing else changes over the next few days, I'm likely to hedge my bets by selling half of my position, and let the rest ride until it's taken out by the tender offer unless I see a better short term use for that money -- one benefit here is that it's an all cash deal and should have no regulatory implications, so the expected tender offer in two weeks and closure of the deal within a couple months is probably quite feasible. Absent a bidding war that hasn't yet shown its handsome face, this isn't going to drag on.

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