Small-Cap Mergers

Mar 29th, 2007 | By Penny Sleuth Contributor | Category: Investing Strategies

It’s the dream of every penny stock and small-cap investor. Actually, it’s the dream of every investor, period. And it looks something like this…

Towerstream Shares Jump From $0.66 to $6.00 In One Day

This is what can happen when a small WiMAX company (a provider of commercial Internet access using fixed-wireless technology) does a reverse merger, or goes public through an acquisition. In this case, Towerstream (TWER.OB: OTC BB) of Rhode Island went public in a very stealthy manner — buying the assets of a miniscule publisher of calendars of female models, University Girls Calendar, Ltd. (formerly UGIR).

The main reasons a company would go public through a reverse merger is that they are quick and cheap. The whole thing can be wrapped up in a month and only costs $100,000 in fees.

Under the calendar business model, this stock literally traded for pennies — 66 pennies to be exact. That’s the level UGIR shares were the day before Towerstream took over and the stock became TWER…and immediately opened at $6.00 a share. That’s a rise of 809%. During the same trading session, TWER ran even higher, nearly doubling as it reached $11 per share. That equated to a 15,667% return in twenty-four hours.

If we look back to the UGIR days and calculate the year-to-date return on Towerstream with its recent $6.70 close, we’ve got a stock that is up 17,457%.

I hate to look at hypothetical investment situations. It’s too much like wondering what would have happened if you bought a winning lottery ticket…but we’ll do it anyway. Say you held $10,000 of University Calendar Girls stock. After the reverse merger with Towerstream, that $10,000 investment would be worth over $1.7 million dollars.

Looking at a hypothetical situation like that isn’t exactly pointless. That’s just how some investment banks have opted to get paid for advising on reverse merger deals like this one. They’ve been able to buy shares before the deal closes, knowing what the new entity will be worth. The banker will then hold the shares at least a year, so that taxes on the gain will be treated as long term. This is much more attractive than getting paid a similar amount only to be taxed immediately as ordinary income…

So what about Towerstream today? Is it fully valued? Is it a bargain?

First off, don’t confuse Towerstream’s business with all of the bankrupt competitive local exchange carriers (CLECs) like Teligent and Winstar from a few years ago. Those companies, and companies like them, pinned their hopes on direct line-of-sight methods to solving the last mile telecom problem — the battle to connect a communication’s provider to lots of individual customers while still offering high bandwidth.

The product they offered was local phone, long-distance, and Internet all on one bill, and better service.

The problem was that’s what every CLEC offered…

The fight to gain customers at any cost for services that were the same as the next guy’s killed the CLECs.

Towerstream is a stock to watch, but there are many reasons not to buy it now. Probably, the best reason not to buy TWER shares is that you basically can’t. There are only 23.72 million shares outstanding and trading volume is very low. As I write this, only 2,200 shares have been traded today, which translates to only about $15,000 worth of stock. Another reason to hold off buying is that very little information is available on the company. Until just recently, you couldn’t pull up a detailed filing on it without instead finding one for the calendar operation. And finally, it looks like at the moment, Sprint and Clearwire are the only WiMAX providers with enough spectrum ownership to make a real run at this business.

TWER’s made some inroads, though. They’ve grown their revenue 16.6% last year and narrowed their net loss plus they have networks set up in key markets like New York, Seattle, Los Angeles and Miami.

But this is a small company and its stock is very difficult to buy.

But it’s definitely one to watch if its liquidity grows.

Until next time,
Craig
March 29, 2007

P.S.: Wall Street’s “Big Dogs” build fortunes using 6 hidden kinds of investments the rest of us rarely discover.

Penny Sleuth Contributor

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