Strategic Capital Management, LLC, a hedge fund, which plans to make investments in the creative Computers Ubid. Creative Computers recently sold 20% of its online auction subsidiary Ubid, the public at $ 15 per share. Ubid stock price closed the first day of trading at $ 48, giving Ubid $ 439 million market capitalization. Paradoxically, the stock price of the parent company does not keep pace with its subsidiary. At the end of the first day Ubid as a public company, the cost of equity Creative Computing "was less than the value of its share in Ubid. Market Price implies that no-Ubid Creative Computers assets had a value of negative $ 79 million. Relative prices, and the relationship between ownership Creative Computers Ubid suggest a potential arbitrage opportunities. To evaluate how best to use this opportunity to invest, Helen King, hedge fund manager should understand the risk and expected return of the different long and short positions of justice. "Hide
by Eric Stafford, Mark Mitchell, Todd Pulvino Source: Harvard Business School 3 pages. Publication Date: August 13, 2001. Prod. #: 202024-PDF-ENG
Strategic Capital Management LLC (A)
Case | HBS Case Collection | August 2001 (Revised April 2002)
Strategic Capital Management, LLC (A)
by Mark L. Mitchell, Erik Stafford and Todd Pulvino
Strategic Capital Management, LLC, is a hedge fund that is planning to make financial investments in Creative Computers and Ubid. Creative Computers recently sold approximately 20% of its Internet auction subsidiary, Ubid, to the public at $15 per share. Ubid's stock price closed the first day of trading at $48, giving Ubid a $439 million market capitalization. Paradoxically, the parent's stock price did not keep pace with that of its subsidiary. At the end of Ubid's first day as a public company, Creative Computers' equity value was less than the value of its stake in Ubid. The market prices implied that Creative Computers' non-Ubid assets had a value of negative $79 million. The relative prices and ownership link between Creative Computers and Ubid suggest a potential arbitrage opportunity. To evaluate how best to exploit this investment opportunity, Elena King, the manager of the hedge fund, must understand both the risks and expected returns associated with different long and short equity positions.
Keywords: Risk and Uncertainty; Business Subsidiaries; Internet; Investment Funds; Price; Performance Efficiency; Capital Markets; Auctions; Investment Return; Equity; Planning; Financial Services Industry;