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Risk Arbitrage

ISBN: 978-0-470-41571-9
Paperback
304 pages
January 2009
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Preface ix

Chapter 1 Introduction 1

Derivation of Risk Arbitrage 1

The Arbitrage Community 4

A Changing Community from the 1970s to 2000 6

1970s 6

1980s 10

1990s 14

2000 17

Chapter 2 Merger Arbitrage 21

General 21

Gathering Information 22

Figuring of Parities 26

Determination of the Time Element 27

Return on Investment 29

The Risks 29

Average Expected Returns 33

Taking a Position 35

Turning a Position 37

Consummation 38

Tax Strategy 40

Treatment of New Convertible Securities 42

Antitrust Considerations 45

Summary 46

Chapter 3 Merger Arbitrage: Practical Applications 47

Mergers Prior to 1971 47

Generic Calculation of Co. B. Being Acquired by Co. A (Co. B/Co. A) 48

Scientific Data Systems/Xerox 50

Hartford Fire Insurance/I.T.&T. 52

Canada Dry/McCall’s/Hunt Foods 55

Eversharp/Warner Lambert Pharmaceutical 59

Alloys Unlimited/Plessey, Ltd. 66

Chubb Corp./First National City Corp. 70

Mergers from 1971 to the Present 73

New England Nuclear Corp. with Dupont DeNemours Inc. 73

Reliance Electric/Exxon 76

CIT Financial/RCA 78

Richardson-Merrell/Dow Chemical 81

Twentieth Century Fox Film Corp. 82

Use of Options in Merger Arbitrage 84

Utah International/General Electric (without options) 84

Utah International/General Electric(with options) 85

Chapter 4 Cash Tender Offers 89

Situations Prior to 1971 89

Cash Tender Wave of the Late 1970s and Early 1980s 95

Introduction 95

Babcock & Wilcox/McDermott/United Technologies—Merger Chronology (All information is from prospectus and joint proxy statement issued February 22, 1978) 96

Carborundum/Kennecott Eaton Offer of $47/Share 99

Rosario/Amax 100

Warner Swasey/Bendix/Dominion Bridge 102

Pullman/Wheelabrator Frye/McDermott 106

Liggett Meyers/Grand Metropolitan Hotels/ Standard Brands 108

Hobart/Canadian Pacific/Dart & Kraft 111

St. Joe Minerals/Seagrams/Fluor Corp. 112

Chapter 5 Other Risk Arbitrage Situations 117

Exchange Offers 117

Recapitalizations 120

Spinoffs 123

Stub Situations 125

Limited Risk Arbitrage 129

Chapter 6 Corporate ‘Freezeins’: The Subterfuge Syndrome 133

Introduction 133

Some Notable Examples 134

Conclusion 141

Chapter 7 Active Arbitrage 143

The Bache/Pru-Bache Years (1967–1991) 144

Great Western United Corporation 144

Gerber Products Company 145

The McGraw-Hill Corporation 146

The ERC Corporation of Kansas City, Missouri 147

Amax Incorporated 148

Houston Natural Gas 148

The Wyser-Pratte Years: Years of Increasing Activism (1991–Present) 149

A New Beginning 149

Evolution of the Wyser-Pratte Shareholder Rights By-Law 150

Transition 157

Chapter 8 Summary and Conclusions 159

Appendix A 163

Appendix B 181

Appendix C 185

Notes 273

Bibliography 279

Index 283

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