Crisis Investing Comes to Merge Technologies

Hedge fund managers are paid to take calculated risks. A select few have deduced that there are profits to be had in buying shares of scandal-ridden companies.

This philosophy, known as crisis investing, has recently led several fund managers to buy shares of Merge Technologies(MRGE Quote), a Milwaukee-based medical software company whose shares have been battered since late February by accounting restatements, an ongoing Securities and Exchange Commission investigation, the recent resignation of its CEO and a potential delisting from the Nasdaq.

Silver Point Capital, a Greenwich-based private equity and hedge fund firm, disclosed earlier this month a 5.28% passive stake in Merge Technologies in a 13G SEC filing. At around the same time, Larry Feinberg, a managing partner at Oracle Partners, a health care hedge fund, disclosed a 5.70% stake in a 13D filing.

Oracle had $800 million under management at the end of last year, but an executive at the firm declined to give an updated number on its assets or comment about Merge. With 1.23 million shares, the position represents less than 2% of the fund's holdings, on the basis of the size of the firm as of December. For Silver Point, a fund with over $5 billion under management, the 1.15 million shares invested in Merge represent less than 1% of the firm's holdings. Executives at Silver Point declined to comment.

In addition, some well-known hedge funds also own the stock. S.A.C. Capital Management, the hedge fund founded by one of the Street's best moneymakers, Steven A. Cohen, reported a 2.2% stake last month, and activist hedge fund manager Jana Partners has a 2.98% ownership.

Merge, which was recently down 1.7% at $11.85, has lost more than half its value since the beginning of the year. These hedge fund managers, among others, are making a huge bet that there's been an overreaction to the scandals, creating an opportunity in a company with a strong business. A short time will tell if they're right.