Buy Converge Technology before it’s sold, this investor says

It’s been a couple of months since news broke that Canadian IT services provider Converge Technology Solutions (Converge Technology Solutions Stock Quote, Charts, News, Analysts, Financials TSX:CTS) could be the subject of a takeover. But while we sit and wait for further details, portfolio manager Jordan Zinberg says now is a great time to be buying the stock, if not for the potential buyout then for the company, which continues to show strong growth.

“The way I’m looking at this trade is the stock is sitting around $6, maybe slightly underneath. If it gets sold the range is probably $8 to $10, maybe slightly higher,” said Zinberg, President and CEO of Bedford Park Capital, who in a Monday segment on BNN Bloomberg nominated Converge Technology to his list of Top Picks for the 12 months ahead. 

“In my scenario analysis, I’m using $9, which would give you a 50 per cent upside from these levels,” he said.

Converge made the announcement in November that it’s undergoing a strategic review due to expressions of interest from outside parties.

“Our management team is fully aligned with the Board’s decision to explore strategic options to maximize shareholder value,” said Shaun Maine, CEO, in a press release.

Since then, the only word has come from a mid-December note from CTS saying it has retained co-financial advisors to assist with the review process.

With a current market capitalization of $1.2 billion, Converge’s share price was sinking fast leading up to the November 22 announcement. The stock had gone from north of $12 in late 2021 to just under $4 per share but then quickly bumped up to $5 after the announcement. Along with the rest of the market, CTS headed higher over January and is now trading around $5.80.

Zinberg said there’s downside potential if Converge determines there are no suitable buyers, but he thinks the risk-reward is too attractive to pass up.

“If the company is not sold, you’d probably see some of the shareholders who owned it just because of the deal head for the exits. You’d probably see it trade down to about $5, maybe slightly lower, as the shareholder base turns over and they go back to just running the business — which, quite frankly, I wouldn’t be that opposed to. I think that they can easily double the size of this business over the next three years,” he said.

“The bottom line is you’re looking at over the next three months while they work through this process probably 50-ish percent upside and maybe 15 per cent downside. That’s a great risk-reward,” Zinberg said.