We now have the first real test of our Computer Modelling Group odd-lot trade, and the preliminary result is almost as favorable as it could have been.
Computer Modelling Group Ltd. (TSX: CMG) says its substantial issuer bid expired September 21 with a preliminary purchase price of C$4.50 per share, the very top of its C$4.00 to C$4.50 Dutch-auction range. CMG expects to purchase approximately 4.44 million shares for about C$20 million.
For our 99-share paper position, that implies a gross profit of C$69.30 on an initial C$376.20 investment, or approximately 18.4%, before taxes, withholding, commissions, foreign-exchange costs and corporate-action fees.
Even better, the odd-lot provision turned out to matter. The offer was oversubscribed, ordinary auction and purchase-price tenders are expected to receive only about 84% acceptance, and qualifying odd-lot tenders are exempt from that proration.
What Actually Happened
When we first wrote about CMG’s tender, the shares had closed at C$3.80 and the company was offering between C$4.00 and C$4.50. That gave the paper trade a positive gross spread even if the auction cleared at the minimum price.
The auction instead reached the maximum. According to CMG’s preliminary results, approximately 4.66 million shares were tendered through auction and purchase-price tenders. The company currently expects to buy about 3.93 million of those shares, implying approximately 84% proration for the ordinary tender pool.
CMG also received approximately 8.97 million shares through proportionate tenders and expects to purchase roughly 511,000 of them. After the repurchase, the company expects to have approximately 73.6 million shares outstanding.
The figures remain preliminary and are still being verified by the depositary. CMG says it will announce final results after the shares are taken up and paid for, so I am treating this as a preliminary postmortem rather than closing the file completely.
Our 99-Share Paper Trade
| Item | Result |
|---|---|
| Reference price | C$3.80 |
| Shares | 99 |
| Hypothetical cost | C$376.20 |
| Preliminary tender price | C$4.50 |
| Gross tender proceeds | C$445.50 |
| Gross profit | C$69.30 |
| Gross return | 18.4% |
That is the top end of the range we calculated when the trade went into the paper portfolio. At the C$4.00 minimum, the gross return would have been about 5.3%; every additional ten cents in the clearing price added C$9.90 to the proceeds from 99 shares.
A properly submitted purchase-price tender would also have received the C$4.50 clearing price. The investor did not have to guess C$4.50 in advance to receive C$4.50 once the auction settled there.
The Odd-Lot Provision Earned Its Keep
This result is more useful than a tender where everyone gets accepted. One reason we track odd-lot tenders is that holders of fewer than 100 shares can sometimes escape proration that applies to larger shareholders. CMG gave us an unusually clean demonstration.
The company currently expects ordinary auction and purchase-price tenders to be accepted at roughly 84%. A qualifying odd-lot holder who properly tendered 99 shares is exempt from that proration under the offer terms.
For a larger shareholder, 84% acceptance means retaining approximately 16% of the tendered position and continuing to bear the market risk on those shares. The 99-share investor avoids that residual position if the preliminary results are confirmed.
This is exactly where the odd-lot clause creates economic value. It protected the small holder from a proration problem that actually occurred rather than from one that existed only in the legal documents.
The 18.4% Number Is Gross
C$69.30 is the correct gross paper profit from our recorded entry price, but it is too early to call that the investor’s net profit. CMG is a Canadian company, and Canadian issuer bids can create tax and withholding complications, particularly for non-Canadian holders.
Brokerage costs can also matter disproportionately on a C$376 position. If total commissions, foreign-exchange costs and corporate-action fees consumed C$25, for example, the C$69.30 gross profit would fall to C$44.30 before any tax consequences. A more expensive broker could take a much larger bite.
That distinction belongs in our scorecard. The paper portfolio can record an 18.4% gross return based on the tender mechanics, while the actual after-tax result will vary by investor, account, broker and tax treatment.
What CMG Teaches Us About the Next Odd-Lot Tender
The first lesson is that entry price matters as much as the odd-lot provision. CMG began with an unusually favorable setup because our C$3.80 reference price sat below the entire C$4.00 to C$4.50 tender range. We did not need a heroic auction result merely to produce a positive gross spread.
The second lesson is that odd-lot preference is most valuable when proration actually happens. CMG was oversubscribed enough to leave ordinary holders facing roughly 84% acceptance, while the qualifying odd-lot holder retained full protection. That is considerably more interesting than an offer where capacity is sufficient to buy every tendered share.
The third lesson concerns Dutch auctions. A purchase-price tender can preserve eligibility for the eventual clearing price without requiring the investor to predict that price in advance. Here, the auction reached C$4.50 and delivered the maximum possible gross result from our original range, although future auctions can just as easily clear at the bottom.
Finally, small special situations demand ruthless attention to friction. An 18.4% percentage return sounds enormous, while C$69.30 of gross profit leaves plenty of room for fees, foreign exchange and withholding to matter. A good odd-lot setup needs attractive mechanics and enough dollars of spread to survive the trip through a brokerage account.
Subject to CMG’s final verification, the mechanical verdict on this one is clear: the 99-share structure did what we wanted it to do, the odd-lot exemption had real value, and the Dutch auction delivered the highest price available.
I’m tracking these offers as they appear and then coming back after expiration to see whether the paper trade actually worked. If you want the next odd-lot opportunity and its postmortem, join the Inelegant Investor email list.