Why Shares of Home Loan Servicing Solutions Gapped Up

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Home Loan Servicing Solutions (NASDAQ: HLSS) rose as much as 11% after the company announced that it has agreed to be acquired by New Residential Investment (RITM -0.10%) for $18.25 per share in an all-cash deal that values the company at $1.3 billion.

So what: The acquisition price represents a meager 9% premium over Friday's closing price and is 28% below the stock's July 2013 all-time high. Note that shares of New Residential are up almost as much as those of Home Loan Servicing today, which suggests the market believes the acquirer is capturing a significant value in the transaction.

Indeed, based on the daily price chart I'm looking at, it appears Home Loan Servicing Solutions shares have been trading at or above New Residential's offer price since shortly after 10 a.m. EST. That suggests that the market might expect some (but not much) improvement on the offer.

However, the statement from Home Loan Servicing Solutions CEO John Van Vlack suggests that he didn't enter negotiations with tremendous bargaining power or ambitions [my emphasis]: "I am pleased that this transaction offers our investors cash equivalent to the book value of their shares and addresses the uncertainty associated with our future financing obligations." Getting paid book value is something to celebrate?

Now what: For investors who didn't already own shares of Home Loan Servicing Solutions, I wouldn't recommend buying them now -- merger arbitrage (i.e., betting on the completion of announced transactions) is not an arena for individual investors. For existing shareholders, it might be worth hanging on to the shares for a couple weeks to see if a raised offer or new bidder emerges. Beyond that, it's probably time to sell and move on the next opportunity. New Residential's acquisition of Home Loan Servicing Solutions is expected to close in the second quarter.