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  Partial fills can be a pain ... or a pleasure

BENJ GALLANDER and BEN STADELMANN

Friday, September 19, 2008

It's a common scenario for the patient buyer of beat-up small-cap stocks. You throw in a limit order with a long time frame at well below the current ask price and wait for a bite. But instead, you get a nibble from a minnow and end up buying 500 shares of a 61-cent stock. Definitely not enough for a fish fry.

In the old days of high minimum commissions, this was a real pain, and it made all-or-none orders an attractive alternative, although those types of orders have deficiencies as well. Now, with trades costing around $10, picking up a piddly number of shares is no big deal, but it is still annoying.

After a partial fill occurs, it's a good idea to review the order as market conditions may have changed since the initial bid was placed. If the investor is still keen on acquiring a significant position, then the limit price can be adjusted slightly to increase the chances of obtaining the desired number of shares. Or, if the purchase was somewhat marginal in the first place, it might make sense to pull the order, lie low for a while and see what develops.

Such was the case when one Contra Guy bought a tiny stake in Virtek Vision International. The Waterloo, Ontario-based firm makes templating lasers for the aerospace and prefabricated construction industries, and marking and engraving lasers for various industrial applications.

Virtek was on the Contra Watch List for several years as it struggled with the transition from a fast-growing and modestly profitable company in the 1990s to dealing with an overextended cost structure and heavy losses after 2001.

We trooped out to the annual general meeting in May of last year, where we heard some encouraging things but ultimately concluded that there were insufficient grounds to add the company to the Contra portfolio. Nonetheless, as sometimes happens, one of us liked the company a little more than the other, hence, the low-ball bid that was cast into the market.

The wonderful thing about being a shareholder, even a very minor one, is that it yields a deeper understanding of the corporation's affairs. Reading scads of quarterly reports on a well-populated watch list gets tedious, but the feeling that comes with being an owner automatically makes them much more interesting.

As expected, the collapse of the home-building industry in the United States had a negative effect on sales. In January, Stephen Sorocky took over the reins as president and chief executive of the ailing enterprise, promising to focus on margins and profitability rather than revenue growth.

In May, the stock price was wallowing forlornly near the 40-cent level when a takeover offer at 65 cents was received from Stockeryale. A quick perusal of Stockeryale indicated a company even smaller than Virtek, and in deep doodoo with Laurus Funds, a New York investment bank known as a lender of last resort for companies in desperate straits. It was no surprise that Virtek's management gave the offer the cold shoulder.

But Stockeryale persisted like a yellowjacket demanding to taste your iced tea on the patio. Soon the mailbox was filling up with a series of amended offers, each one swatted away by missives from Virtek's management urging shareholders to refuse to tender.

The critical point was reached with a press release issued on July 23. Though Virtek had made offhand suggestions that it was pursuing alternatives to increase shareholder value, it now specifically indicated that a pending sale of a division of the company would bring in more than Stockeryale's offer for the whole enchilada.

That was a green light for serious buying, and within a few days a nice position was built up with purchases in the 55- to 60-cent range. A couple of weeks later, Virtek's white knight was revealed: Mitek, a Berkshire Hathaway holding and one of Virtek's customers, agreed to pay $26.5 million for the imaging and templating division. And in true Berkshire fashion, the sum was in cash, without long delays for due diligence. Stockeryale fought back, increasing its offer to 70 cents, plus, after 60 days, another dime.

Now the ball was rolling. Gerber Scientific placed a bid at $1.05 a share, which was met with approval by Virtek's board. But the story isn't over quite yet. This week, Jaguar Financial entered the fray with an offer at $1.12. Jaguar has also made a bid for Royal Laser, stating that they see potential strategic opportunities between the two players in the laser industry.

With the stock trading at just above $1, the position is being held until a clearer picture emerges of which pursuer can table the best offer.


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