PW Eagle Inc. Three possible outcomes.

PW Eagle Inc (Nasdaq: PWEI) is a publicly traded company that makes pvc piping in various grades and dimension. They won't be for much longer. Publicly traded that is. I'm sure they'll still be making pipes because apparently they are pretty good at it.

On January 15 PWEI announced that they had agreed to be taken over by J-M Manufacturing, for $33.50 per share, and the way things have proceeded since then I am convinced that there is little to stop this takeover from happening. There have been no lawsuits from minority shareholders. There have been no objections from any regulatory agency. And just as importantly, there have been no wild swings in the price of PWEI shares that might indicate the presence of, or even the rumor of, a second interested bidder. I'll talk more about that last point in a moment.

In this Reuters report, it states, "PW Eagle makes pipes and fittings and operates 12 manufacturing facilities across the United States. J-M operates 14 manufacturing plants in the U.S., producing pipes for water, sewer, electrical conduits and other uses." It seems like a good fit for both companies and I'm sure there will be substantial cost savings in the combined company.

In the normal course of events J-M Manufacturing would bring in a market specialist to slowly acquire the outstanding shares of PWEI, pending a shareholder vote on the matter. Given that just five or six institutional holders own a majority of PWEI the results of the vote are pretty much a given. If the institutional holders wanted to fight this deal, we would have heard about it before now. In fact, the specialists are already hard at work picking up the outstanding shares at a slight discount to the agreed price of $33.50. The company will be delisted shortly after the closing of the deal. That would be the normal, and first possible outcome, and the most likely in my opinion.

The second possible outcome is that this agreement fails for whatever reason. J-M can't arrange financing (seriously unlikely, imo), PWEI shareholders turn down the agreement (again, seriously unlikely), or fraudulent circumstances come to light (again...).

The third possible outcome is that a second interested bidder could make an offer. If there were a hint of that in the markets we would see chart action similar to Harrah's Entertainment (NYSE: HET), this week. The specialist here has been doing a yeoman's job of accumulating the stock at a slight discount. Until that is, this week. Nothing more than a rumor hit the market and it's a long time frame on the HET takeover. This sort of action could occur repeatedly while time drags by. Any party interested in PWEI is going to have to move quickly and I just don't see it happening. The one major shareholder has agreed to vote for the proposal and that is tough to fight.

I mentioned Harrah's about a week ago as a "comparable situation" just on the basis of the chart action. Someone pointed out that the situation among the PWEI short sellers is not comparable at all to the short selling in HET, which is minimal. I would contend that now, two weeks after the PWEI takeover announcement, the two situations are now comparable. Any short seller with half a brain has closed his position and moved on because they can also see that the second possible outcome is just not likely, and that would be the only way to profit from an on-going short position.

And while I'm talking about short sellers, let me just add a bit that I think far too many people forget, certainly among the posters on the yahoo boards. Short sellers, whether selling naked or not, do not operate in a vacuum. Even a major hedge fund will clear their trades through a larger tier-1 firm such as Goldman Sachs, or Bear Stearns, etc. You need to put up a significant amount of capital to get the attention of such an organization, particularly if you intend to trade a high-risk trading strategy. These traders are responsible for their position because their broker will not take a loss for them.

On the other side of a short selling transaction is a buyer, and those tier-1 firms and below are also responsible to their buy-side clientele. Even if my account has not actually been credited with the shares of a company that I purchase, my account will be credited with an entitlement that my broker creates. And that's important. My broker is responsible for having created that entitlement. My broker will automatically issue a "Forced Buy In Notice" to the seller in order to offset risk.

In a situation such as we are in with PWEI today, I, as a buy-side client will want my $33.50 for my shares. I can sell the shares that I think exist in my account, but if in fact I only have an entitlement and no shares are available to my broker to effect the trade on a cost-free, risk-free basis, my broker will use that "Forced Buy In Notice" and the short seller will ultimately lose. In todays situation, the former short sellers are clearing out just as fast as they can given the limitations of volume of trading in PWEI shares. Why should they face a forced buy in for $33.50 (or higher) in a few months when they can get out now at $33 or so?

Ok. Enough from me. I hope that was informative and helped somebody.