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(B)(N) DOV Dover Corporation

May 23, 2013

Deal Book. Dover Corporation is an industrial powerhouse of middle-America, the US- amerikanischen Mittelstand, so to speak, and is planning to spin-off some, but not all, of its communication technologies businesses into a newly independent and publicly traded company to be named Knowles Corporation (Reuters, May 23, 2013, Dover to spin off some communication technologies businesses, and Dover Corporation, May 23, 2013, Knowles Corporation to Become a Standalone Global Communications Technology Leader).

Although “spinning-off” sounds casual and recreational, there are many ways to do it, and one of the considerations is that the spin-off be entire, as 100% of the new stock of Knowles shall be distributed to Dover shareholders, and tax-exempt to both Dover and, at least, to its U.S. shareholders; and it can be thought of as a capital loss to Dover stock offset by a capital gain on the new Knowles stock.

But what’s in it for Dover is yet to be determined, and still under the company’s control, and spin-offs usually cause turmoil in institutional portfolios that don’t know how to make or receive a “gift” because of some abstract parameters such as “size” or “correlations” (for information on M&A structures, please visit the website  http://macabacus.com/).

Dover has been in the Perpetual Bond™ since $60 last year and is currently trading at $80 (please see Exhibit 1 below, Red Line Stock Price (SP) above the Black Line Risk Price (SF), and for no other reason); the dividend is $0.35 per share per quarter for an annual payout of $240 million to the shareholders and a current yield of 1.8%.

The indicated stop/loss due to price volatility is minus (-$7) per quarter so that we would not be surprised by any price between the current $80 and $73 or $87, but, of course, all of that goes out the window once the terms of the spin-off mature, for which there is no timetable pending a number of  regulatory filings and rulings from the SEC and IRS, and a final sign-off from the Dover Board of Directors.

To manage our risk, absent selling the stock today, we’re inclined to buy the June put at $75 for $0.45 per share, today, and sell the offsetting call at $80 for $1.50, so that we can hold the stock at $80, make a gain on the collar of $1.05 per share ($0.45 less $1.50), net of transactions costs, of course, and not be sold-out for less than $75 although we might be called out at $80 before the week is over. Which solves our problem another way.

Exhibit 1: (B)(N) DOV Dover Corporation – Risk Price Chart

(B)(N) DOV Dover Corporation

(B)(N) DOV Dover Corporation

Dover Corporation owns and operates a global portfolio of manufacturing companies providing innovative components and equipment, specialty systems and support services for a variety of applications.

(Please Click on the Chart to make it larger if required.)

From the Company: Dover is a diversified global manufacturer with annual revenues of over $8 billion. For over 50 years, Dover has been delivering outstanding products and services that reflect its market leadership and commitment to operational and technical excellence. The Company’s entrepreneurial business model encourages, promotes and fosters deep customer engagement which has led to Dover’s well-established and valued reputation for providing superior customer service and industry-leading product innovation. Dover focuses on innovative equipment and components, specialty systems and support services through its four major operating segments: Communication Technologies, Energy, Engineered Systems and Printing & Identification. Headquartered in Downers Grove, Illinois, Dover employs 35,000 people worldwide.

The Price of Risk

The calculated Risk Price (SF) is a provably effective estimate of the “price of risk” which is “the least stock price at which the company is likeable” (Goetze 2009) and “likeability” is determined by the demonstrated factors of “risk aversion” – we want to keep our money and obtain a hopeful return above the rate of inflation – and the properties of portfolios of such stocks.

Stock prices that are less than the price of risk can be said to be “bargain prices” but with the risk attached that the company might never get a higher price other than that due to ambient volatility or “surprise”; on the other hand, investors who are willing to pay the “full price” above the price of risk, and buy and hold the stock at those prices, must also be confident, and have reason to believe, that the company will produce those values, absent new information.

Please see our Posts, The Price of Risk, August 2012 and The Nash Equilibrium & Its Stock Price, October 2012, for more information on the theory.

To see what else “risk averse” investing can do for us, please see our recent Posts, The Wall Street Put, April 2013, and earlier Posts such as The Dow Transports, March 2013, or The Risk Adjusted Dow, March 2013, or The Canada Pension Bond, February 2013, and for a more colorful description of investment risk and the application of the “price of risk” to mergers & acquisitions, please see our Post, Bystanders & Collateral Damage, April 2013.

Postscript

We are The RiskWerk Company and care not a jot for mutual funds, hedge funds, “alternative investments”, the “risk/reward equation” and every other unprovable artifact of investment lore. We have just one product

The Perpetual Bond™
“Alpha-smart with 100% Capital Safety and 100% Liquidity”
Guaranteed
With No Fees and No Loads on Capital

For more information on RiskWerk, please follow the Tags or Categories attached to this Letter or simply enter Search for additional references to any term that we have used. Related data may be obtained from us for free in a machine readable format by request to RiskWerk@gmail.com.

Disclaimer

Investing in the bond and stock markets has become a highly regulated and litigious industry but despite that, there remains only one effective rule and that is caveat emptor or “buyer beware”. Nothing that we say should be construed by any person as advice or a recommendation to buy, sell, hold or avoid the common stock or bonds of any public company at any time for any purpose. That is the law and we fully support and respect that law and regulation in every jurisdiction without exception and without qualification to the best of our knowledge and ability. We can only tell you what we do and why we do it or have done it and we know nothing at all about the future or the future of stock prices of any company nor why they are what they are, now. The author retains all copyrights to his works in this blog and on this website. The Perpetual Bond®™ is a registered trademark and patented technology of The RiskWerk Company and RiskWerk Limited (“Company”) . The Canada Pension Bond®™ and The Medina Bond®™ are registered trademarks or trademarks of the Company as are the words and phrases “Alpha-smart”, “100% Capital Safety”, “100% Liquidity”, ”price of risk”, “risk price”, and the symbols “(B)”, “(N)” and N*.

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