How The CheckFree Buyout Killed An ETF (FISV, CKFR, BHH, MER)

Fiserv’s (NASDAQ:FISV) proposed cash buyout of CheckFree (NASDAQ:CKFR) for some $4.2 Billion, did at least make some CheckFree shareholders whole again.  The $48.00 cash buyout price is actually a ‘takeunder’ if you purchased CheckFree stock during much of 2006, but it makes everyone whole who purchased shares over the last year.  You can analyze the merger all you want and decide the closing times and percentages of the deal closing, but this is actually going to all but kill an exchange traded fund.

Enter the B2B HOLDRs (AMEX:BHH).  HOLDRs were some of the original exchange traded funds, or ETF’s, on the market.  This particular ETF launch was a product of the dot.com craze, and by the name "B2B" you can guess that many of the old components or would-be target components have died or been delisted.  HOLDRs can differ from many ETF’s in that the basket of stocks may not change as much as other ETF’s that track either a sector a stated index, and these were originally designed to where they could be unbundled into individual shares.  Unfortunately, you also receive all the underlying shareholder materials as if you were buying each underlying company. 

The B2B HOLDRs has had enough companies that would have fit the description go by the wayside, that it now only has four components that will ultimately become three components if no changes are made.  This ETF should now actually be called the CKFR HOLDRs.  According to the Merrill Lynch (NYSE:MER) website for HOLDRs (this one in particular) this one actually has 81% of its current weighting in CheckFree shares.  As noted, most of the old B2B pure-play stocks have gone and retired.  The actual underlying stocks didn’t start out this dominated if you look at the prospectus, but you will see on page 16 and 17 of the prospectus that the component count is low any way.

The B2B HOLDRs has only traded in a $1.81 to $2.46 range and it quite frequently trades fewer than 50,000 shares in a day.  If an ETF ever needed to be retired, the B2B HOLDRs is it.

Jon C. Ogg
August 8, 2007

Jon Ogg can be reached at [email protected]; he does not own securities in the companies he covers.