Try the 'Anti-Arbitrage' Merger Play

On Tuesday we saw BHP Billiton (BHP - commentary - Cramer's Take) pull out of its merger with Rio Tinto (RTP - commentary - Cramer's Take), citing a weakening economy and falling commodity prices. The announcement sent Rio shares tumbling to prices not seen since 2005, down over 35% at one point during the day, as arbs dumped their shares into the market. By midday the shares had recovered 6 points off the low.

Last week, shares of Epicor Software (EPIX - commentary - Cramer's Take) fell almost 20% during the trading day when hedge fund Elliott Associates backed out its bid for the company. The shares rebounded from the arb-dumping low of $2.91 to $3.50 today. When SanDisk (SNDK - commentary - Cramer's Take) rebuffed Samsung's buyout, the stock fell to $8 very quickly before rebounding to $10.

I want to emphasize that I view these as short-term trades only. Quite often, after the first snapback rally, more selling will come into the market as less leveraged players work out of their arbitrage positions. If the stock does not bounce in a day or two, sell it and move on to the next one. Often, you will get another chance at these stocks when selling pushes it to valuations that are attractive. There has also been some research that suggests that failed takeovers end up getting bought out in the future by another company. It is best to wait until the target of the failed buyout fits your valuation criteria before considering a long term purchase in the stock.

Several stocks have hit my value screens that were the targets of failed buyout attempts earlier this year. Bronco Drilling (BRNC - commentary - Cramer's Take) was offered over $18 a share by Allis-Chalmers (ALY - commentary - Cramer's Take). Today the shares trade with a 5-handle at one-third of book value. Mexican billionaire Carlos Slim Helu apparently believes the stock is cheap enough. He recently disclosed a 7.6% stake in the company.

Specialty retailer Charlotte Russe (CHIC - commentary - Cramer's Take) rejected a $9 takeover offer form KarpReilly Capital Partners last week. The shares, already down in the poor retail environment, now trade below $5. The company has over $2 a share in cash and no debt. The board clearly feels the company would be worth more in a better retail climate. I agree and believe the shares are cheap.

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At the time of publication, Melvin had no positions in stocks mentioned, although positions may change at any time.

Please note that due to factors including low market capitalization and/or insufficient public float, we consider EPIX, BRNC, ALY and CHIC to be small-cap stocks. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.Tim Melvin is a writer from Stevensville, Maryland, who spent 20 years a stockbroker, the last 15 as a Vice President of Investments with a regional firm in the Mid Atlantic area. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Melvin appreciates your feedback; click here to send him an email.