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A Small-Cap Merger Trading at a 32% Annualized Return

- By Bram de Haas

UQM Technologies (UQM) is a $94 million market cap company that designs and sells electric motors, generators, power electronic controllers and fuel cell compressors. UQM Technologies is being acquired in cash by a Danish behemoth called Danfoss. The spread on this deal has widened recently to 2.34% and is now implying an approximately 32% or greater annualized return. The only remaining hurdle is CFIUS, also known as the Committee on Foreign Investment in the United States.

This deal is very likely to close, in my view. Delays are certainly possible, which would decrease the annualized return. However, among the deal universe, this situation currently looks particularly attractive. The company also just held an earnings call. Even though CEO Joe Mitchell said some reassuring things about the merger on it, the merger spread didn't really close.

It was also obvious from the earnings call that there are many disgruntled retail shareholders in this name. This is also apparent in UQM Technologies's institutional ownership percentage, which is extremely low at 14%. I rarely see a figure this low, and it jumped significantly after the sale announcement. That's a positive sign because perhaps it is not very efficiently traded.

The most relevant highlights from the earnings call were (emphasis is mine):

Unidentified analyst

It sounds like you're having a great quarter. It sounds like this is what I thought would happen a long time ago with this company. And I'm very unhappy that we're not going to be -- that I am not going to be a part of it. But I wanted to know what the feeling is with CFIUS? They denied it last time and now that Danfoss is not a Chinese company but they are in China and probably a lot of the business is in China. Do you think that the U.S. will allow this merger to happen?

Joe Mitchell

Yes. Our expectation is yes they will allow it to happen. I mean when we had discussions with CFIUS in the past, obviously the big concern was Chinese companies buying up U.S.-based companies and the transfer of the intellectual property. And Danfoss being a global company with thousands of employees here in the U.S. and as with most companies have businesses all over the world and this type of merger and alliance was exactly what CFIUS was encouraged to look for when they blocked the previous deal. So it's our expectation that this should go through without major issues. And we're in regular discussion with CFIUS and answering follow-on questions, so we expect this process to continue and be successful in the end.

Unidentified analyst

So, sometime before June then?


That's what -- well, probably, it's going to be in June. It would be our expectation by the end of the first quarter or second quarter, would be our expectation.

Mitchell sounded quite confident that the deal will close. He sounded less confident about the time frame. He rolled with June but hedged the statement by suggesting it will be the end of June. If it closes at the end of June, it would produce a 32% annualized return. I'm increasing my position here because it looks like a very favorable bet to make.

Disclosure: Long UQM.

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This article first appeared on GuruFocus.