Merger Arbitrage : How to Profit from Event-Driven Arbitrage

by Kirchner, Thomas

• ISBN13: 9780470371978
• ISBN10: 0470371978
• Format: Hardcover
• Copyright: 2009-08-03
• Publisher: Wiley

Summary

A detailed look at an important hedge fund strategyWritten by a fund manager who invests solely in merger arbitrage and other event-driven strategies, Merger Arbitrage is the definitive book on how this alternative hedge fund strategy works. Initial chapters are dedicated to the ins and outs of the strategycash mergers versus stock for stock mergers, legal aspects of mergers, and pitfalls of the merger processwhile later chapters focus on giving the reader sound advice for integrating merger arbitrage into an investment portfolio. Merger Arbitrage helps readers understand leverage and options, shorting stocks, and legal aspects of merger arbitrage, including seeking appraisal or filing lawsuits for inadequate merger consideration. For those looking to gain an edge in the merger arbitrage arena, this book has everything they need to succeed.Thomas F. Kirchner, CFA (New York, NY), is the founder and portfolio manager of Pennsylvania Avenue Funds (www.pennavefunds.com), which invests in merger arbitrage and other event-driven strategies.

Author Biography

Thomas Kirchner, CFA, is the founder and portfolio manager of the Pennsylvania Avenue Funds (www.pennavefunds.com), which invests in merger arbitrage and other event-driven strategies. He also serves as the President and a trustee of the fund. Kirchner?s personal blog, The Deal Sleuth, tracks problematic mergers. He holds a BSc from King?s College, University of London, a Dipl?me from the Institut d?Etudes Politiques de Paris (Sciences Po), and an MBA from the University of Chicago Booth School of Business.

Table of Contents

Preface	p. ix
Acknowledgements	p. xii
The Arbitrage Process	p. 1
Introduction to Merger Arbitrage	p. 3
Cash Mergers	p. 12
Stock-for-Stock Mergers	p. 19
Incorporating Risk into the Arbitrage Decision	p. 43
Probability of Closing	p. 45
Severity of Losses	p. 60
Expected Return of the Arbitrage	p. 68
Sources of Risk and Return	p. 71
Deal Spread	p. 71
Two Aspects of Liquidity	p. 73
Timing and Speed of Closing	p. 80
Dividends	p. 87
Short Sales as a Hedge and an Element of Return	p. 90
Leverage Boosts Returns	p. 93
Covered Call Writing	p. 95
Commissions and Portfolio Turnover	p. 98
Bidding Wars and Hostile Bids	p. 100
Deal Structures: Mergers and Tender Offers	p. 103
Mergers	p. 103
Tender Offers	p. 108
Comparison of Mergers and Tender Offers	p. 109
Pitfalls of Merger Arbitrage	p. 117
Financing	p. 119
Types of Debt Funding	p. 122
Financing of Mergers versus Tender Offers	p. 130
Uncertain Merger Consideration	p. 131
Conflicted Role of Investment Banks	p. 135
Fairness Opinions	p. 140
Systemic Risk	p. 142
Legal Aspects	p. 145
Merger Process	p. 148
Takeover Defenses	p. 156
Management Incentives	p. 163
Management Compensation	p. 165
Continuing Management Interest in Private Equity Buyouts	p. 171
Long-Term Planning in Management Buyouts	p. 173
Milking a Company through Related Party Transactions	p. 182
Buyouts by Private Equity	p. 187
Private Equity's Advantage	p. 188
CEOs Don't Want to Sell to the Highest Bidder	p. 191
Private Equity Funds Have Their Own Agenda	p. 193
Buyouts as Financial Engineering	p. 196
Minority Squeeze-outs	p. 199
Boards Lack Effectiveness During Squeeze-outs	p. 200
Minority Shareholders Are in a Tough Spot	p. 202
Family Control	p. 210
Government Involvement	p. 213
Antitrust Enforcement	p. 213
SEC's Approach to Regulation	p. 223
State Governments	p. 231
Federal Government	p. 236
Trade Unions	p. 240
Four Ways to Fight Abuse of Shareholders in Mergers	p. 243
"Just Sell" Is for Losers	p. 243
Case for Activist Merger Arbitrage	p. 246
Legal Tactics	p. 248
Public Opposition	p. 262
Investing in Merger Arbitrage	p. 265
The Role of Merger Arbitrage in a Diversified Portfolio	p. 267
Volatility of Stocks Going through a Merger	p. 268
Return and Correlation Characteristics of Merger Arbitrage	p. 272
Merger Arbitrage outside the United States	p. 278
Risk and Return of Merger Arbitrage Funds	p. 282
Benefits of Merger Arbitrage in a Diversified Portfolio	p. 292
Investing in Arbitrage	p. 301
Trading versus Investing	p. 301
Leverage and Options	p. 302
Shorting Stocks	p. 309
Transaction Costs	p. 315
Managing the Cash Position	p. 318
Risk Management	p. 325
Standard & Poor's Merger Arbitrage Index	p. 329
Separate Accounts	p. 331
Hedge Funds and Mutual Funds	p. 333
Notes	p. 339
About the Author	p. 346
Index	p. 347
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