Merger Arbitrage : How to Profit from Event-Driven Arbitrage

by Thomas Kirchner

• ISBN13: 9780470508114
• ISBN10: 0470508116
• Format: eBook
• Copyright: 2009-07-01
• Publisher: Wiley

Summary

A detailed look at an important hedge fund strategyWritten by a fund manager who invests solely in merger arbitrage, also referred to as risk 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 strategy-cash mergers versus stock for stock mergers, legal aspects of mergers, and pitfalls of the merger process-while 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.

Table of Contents

Preface

Acknowledgments

The Arbitrage Process

Introduction to Merger Arbitrage

Cash Mergers

Stock-for-Stock Mergers

Incorporating Risk into the Arbitrage Decision

Probability of Closing

Severity of Losses

Expected Return of the Arbitrage

Sources of Risk and Return

Deal Spread

Two Aspects of Liquidity

Timing and Speed of Closing

Dividends

Short Sales as a Hedge and an Element of Return

Leverage Boosts Returns

Covered Call Writing

Commissions and Portfolio Turnover

Bidding Wars and Hostile Bids

Deal Structures: Mergers and Tender Offers

Mergers

Tender Offers

Comparison of Mergers and Tender Offers

Pitfalls of Merger Arbitrage

Financing

Types of Debt Funding

Financing of Mergers versus Tender Offers

Uncertain Merger Consideration

Conflicted Role of Investment Banks

Fairness Opinions

Systemic Risk

Legal Aspects

Merger Process

Takeover Defenses

Management Incentives

Management Compensation

Continuing Management Interest in Private Equity Buyouts

Long-Term Planning in Management Buyouts

Milking a Company through Related Party Transactions

Buyouts by Private Equity

Private Equity's Advantage

CEOs Don't Want to Sell to the Highest Bidder

Private Equity Funds Have Their Own Agenda

Buyouts as Financial Engineering

Minority Squeeze-Outs

Boards Lack Effectiveness During Squeeze-Outs

Minority Shareholders Are in a Tough Spot

Family Control

Government Involvement

Anti-Trust Enforcement

The SEC's Approach to Regulation

State Government

Federal Government

Trade Unions

Four Ways to Fight Shareholder Abuse in Mergers

"Just Sell"

Is for Losers

The Case for Activist Merger Arbitrage

Legal Tactics

Public Opposition

Investing in Merger Arbitrage

The Role of Merger Arbitrage in a Diversified Portfolio

Volatility of Stocks Going through a Merger

Return and Correlation Characteristics of Merger Arbitrage

Merger Arbitrage Outside the U.S

Risk and Return of Merger Arbitrage Funds

Benefits of Merger Arbitrage in a Diverisified Portfolio

Investing in Arbitrage

Trading versus Investing

Leverage and Options

Shorting Stocks

Transaction Costs

Managing the Cash Position

Risk Management

Standard & Poors Merger Arbitrage Index

Separate Accounts

Hedge Funds and Mutual Funds

Notes

About the Author

Index

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