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by Thomas Kirchner
Merger Arbitrage, 2nd Edition
Series Page
Title Page
Copyright
Preface
Acknowledgments
Part One: The Arbitrage Process
Chapter 1: Introduction to Merger Arbitrage
Notes
Chapter 2: The Mechanics of Merger Arbitrage
Cash Mergers
Stock-for-Stock Mergers
Note
Chapter 3: The Role of Merger Arbitrage in a Diversified Portfolio
Volatility of Stocks Going through a Merger
Merger Arbitrage Universe
Merger Arbitrage Spreads
Performance Characteristics of Merger Arbitrage
Performance of Merger Arbitrage outside the United States
Risk and Return of Merger Arbitrage Funds
Benefits of Merger Arbitrage in a Diversified Portfolio
Benefits of Merger Arbitrage in a Rising Interest Rate Environment
Quantitative Easing
Notes
Chapter 4: Incorporating Risk into the Arbitrage Decision
Probability of Closing
Severity of Losses
Expected Return of the Arbitrage
Notes
Part Two: Pitfalls of Merger Arbitrage
Chapter 5: Sources of Risk and Return
Deal Spread
Two Aspects of Liquidity
Beneficial Participation of Arbitrageurs
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
Chinese Companies
Notes
Chapter 6: Deal Structures: Mergers and Tender Offers
Mergers
Scheme of Arrangement
Tender Offers
Comparison of Mergers and Tender Offers
Burger King Provision: The Best of Both Worlds
SEC's Approach to Regulation
Notes
Chapter 7: Financing
Types of Debt Funding
Financing of Mergers versus Tender Offers
Uncertain Merger Consideration
Conflicted Role of Investment Banks
Fairness Opinions
Systemic Risk
Notes
Chapter 8: Legal Aspects
Merger Process
Corporation Codes
Takeover Code and Its Derivatives
Key U.S. Court Decisions
Takeover Defenses
Creeping Takeovers and Mandatory Acquisitions
Best Price Rule
Market Manipulation
Notes
Chapter 9: Management Incentives
Management Compensation
Continuing Management Interest in Private Equity Buyouts
Long-Term Planning in Management Buyouts
Milking a Company through Related Party Transactions
Notes
Chapter 10: 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
Activists Replace Private Equity
Notes
Chapter 11: Minority Squeeze-Outs
Boards' Lack Effectiveness during Squeeze-outs
Minority Shareholders Are in a Tough Spot
Family Control
Notes
Part Three: Investing in Merger Arbitrage
Chapter 12: Government Involvement
Antitrust Enforcement
Tax Policy
Securities Regulators
State and Provincial Governments
National Governments
China: The Great Wall of Laws
Trade Unions
Notes
Chapter 13: Four Ways to Fight Abuse of Shareholders in Mergers
“Just Sell” Is for Losers
The Rise of Shareholder Activists
Case for Activist Merger Arbitrage
Legal Tactics
Public Opposition
Notes
Chapter 14: Investing in Arbitrage
Trading versus Investing
Leverage and Options
Shorting Stocks
Transaction Costs
Managing the Cash Position
Risk Management
Merger Arbitrage Indices
Separate Accounts
Hedge Funds and Liquid Alternatives
Notes
About the Author
Exercises
CHAPTER 1
CHAPTER 2
CHAPTER 3
CHAPTER 4
CHAPTER 5
CHAPTER 6
CHAPTER 7
CHAPTER 8
CHAPTER 10
Index
End User License Agreement
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Prev
Previous Chapter
Cover
Next
Next Chapter
Series Page
Table of Contents
Series Page
Title Page
Copyright
Preface
Acknowledgments
Part One: The Arbitrage Process
Chapter 1: Introduction to Merger Arbitrage
Notes
Chapter 2: The Mechanics of Merger Arbitrage
Cash Mergers
Stock-for-Stock Mergers
Note
Chapter 3: The Role of Merger Arbitrage in a Diversified Portfolio
Volatility of Stocks Going through a Merger
Merger Arbitrage Universe
Merger Arbitrage Spreads
Performance Characteristics of Merger Arbitrage
Performance of Merger Arbitrage outside the United States
Risk and Return of Merger Arbitrage Funds
Benefits of Merger Arbitrage in a Diversified Portfolio
Benefits of Merger Arbitrage in a Rising Interest Rate Environment
Quantitative Easing
Notes
Chapter 4: Incorporating Risk into the Arbitrage Decision
Probability of Closing
Severity of Losses
Expected Return of the Arbitrage
Notes
Part Two: Pitfalls of Merger Arbitrage
Chapter 5: Sources of Risk and Return
Deal Spread
Two Aspects of Liquidity
Beneficial Participation of Arbitrageurs
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
Chinese Companies
Notes
Chapter 6: Deal Structures: Mergers and Tender Offers
Mergers
Scheme of Arrangement
Tender Offers
Comparison of Mergers and Tender Offers
Burger King Provision: The Best of Both Worlds
SEC's Approach to Regulation
Notes
Chapter 7: Financing
Types of Debt Funding
Financing of Mergers versus Tender Offers
Uncertain Merger Consideration
Conflicted Role of Investment Banks
Fairness Opinions
Systemic Risk
Notes
Chapter 8: Legal Aspects
Merger Process
Corporation Codes
Takeover Code and Its Derivatives
Key U.S. Court Decisions
Takeover Defenses
Creeping Takeovers and Mandatory Acquisitions
Best Price Rule
Market Manipulation
Notes
Chapter 9: Management Incentives
Management Compensation
Continuing Management Interest in Private Equity Buyouts
Long-Term Planning in Management Buyouts
Milking a Company through Related Party Transactions
Notes
Chapter 10: 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
Activists Replace Private Equity
Notes
Chapter 11: Minority Squeeze-Outs
Boards' Lack Effectiveness during Squeeze-outs
Minority Shareholders Are in a Tough Spot
Family Control
Notes
Part Three: Investing in Merger Arbitrage
Chapter 12: Government Involvement
Antitrust Enforcement
Tax Policy
Securities Regulators
State and Provincial Governments
National Governments
China: The Great Wall of Laws
Trade Unions
Notes
Chapter 13: Four Ways to Fight Abuse of Shareholders in Mergers
“Just Sell” Is for Losers
The Rise of Shareholder Activists
Case for Activist Merger Arbitrage
Legal Tactics
Public Opposition
Notes
Chapter 14: Investing in Arbitrage
Trading versus Investing
Leverage and Options
Shorting Stocks
Transaction Costs
Managing the Cash Position
Risk Management
Merger Arbitrage Indices
Separate Accounts
Hedge Funds and Liquid Alternatives
Notes
About the Author
Exercises
CHAPTER 1
CHAPTER 2
CHAPTER 3
CHAPTER 4
CHAPTER 5
CHAPTER 6
CHAPTER 7
CHAPTER 8
CHAPTER 10
Index
End User License Agreement
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Guide
Cover
Table of Contents
Begin Reading
List of Illustrations
Chapter 1: Introduction to Merger Arbitrage
Figure 1.1 Frequency of the Occurrence of the Term
Arbitrage
in Printed Books
Figure 1.2 Frequency of the Occurrence of the Terms
Merger Arbitrage
and
Risk Arbitrage
in Books
Figure 1.3 Risk Spectrum of Merger-Related Investments
Figure 1.4 Stock Price of Dresser-Rand Group around the Rumor of an Acquisition by Siemens
Figure 1.5 Payoff Distribution for Stock Investors
Figure 1.6 Asymmetric Payoff Distribution
Figure 1.7 Lefèvre Diagram of the Put Option Characteristics of Merger Arbitrage
Figure 1.8 Lefèvre Payoff Diagram of Cash Mergers
Chapter 2: The Mechanics of Merger Arbitrage
Figure 2.1 Stock Price of Autonomy before and after the Merger Announcement
Figure 2.2 Idealized Chart of Stock in a Cash Merger
Figure 2.3 IRR Calculation of Annualized Return in Excel
Figure 2.4 Stock Prices of B2Gold and CGA
Figure 2.5 Evolution of the CGA/B2Gold Spread
Figure 2.6 Fluctuation of Health Care REIT's Stock Price Prior to the Merger
Figure 2.7 Optionality in Mergers with a Fixed-Value Collar
Figure 2.8 Optionality in Mergers with a Fixed-Share Collar
Chapter 3: The Role of Merger Arbitrage in a Diversified Portfolio
Figure 3.1 Daily Price Changes (in pence) of Autonomy Corporation before and after the Merger Announcement
Figure 3.2 Cross-sectional Distribution of Daily Returns (a) before and (b) after the Announcement of a Merger
Figure 3.3 Variance of Daily Returns (a) before and (b) after the Announcement of a Merger
Figure 3.4 Number of Mergers and Waves of Merger Activity since the year 1895
Figure 3.5 Worldwide Volume of Mergers (in US$ trillions, left axis) and Level of the S&P 500 Price Index Since 1992 (right axis) Data: Factset Mergerstat
Figure 3.6 Percentage Cash and Stock Mergers over Time Data: Factset Mergerstat
Figure 3.7 Average Annualized Merger Arbitrage Spread
Figure 3.8 Distribution of Merger Arbitrage Spreads (Annualized) in the Middle of Each Year
Figure 3.9 Percentage Spread of the Kinder Morgan / El Paso Merger
Figure 3.10 Piecewise Linear Regression of Excess Merger Arbitrage Returns versus Market Returns
Figure 3.11 Piecewise Linear Regression of Excess Merger Arbitrage Returns
Figure 3.12 Assets Managed in Merger Arbitrage Funds
Figure 3.13 Monthly Performance of Merger Arbitrage Hedge Funds, the S&P 500, and Bonds
Figure 3.14 Performance of Three Merger Arbitrage Hedge Fund Indices Relative to Stocks and Bonds
Figure 3.15 Risk/Return Trade-off for Merger Arbitrage
Figure 3.16 Performance of Various Merger Arbitrage Hedge Fund Indices Relative to the HFR Hedge Fund
Figure 3.17 Efficient Frontiers for Combinations of Stocks and Bonds as well as Stocks, Bonds, and the HFR Index
Figure 3.18 Risk/Return Trade-off for Mutual Funds That Use Merger Arbitrage
Figure 3.19 Efficient Frontier for Mutual Funds That Use Merger Arbitrage
Figure 3.20 Performance of Merger Arbitrage in Periods of Rising Interest Rates
Figure 3.21 Performance of Several Hedge Fund Strategies in Periods of Rising Interest Rates
Chapter 4: Incorporating Risk into the Arbitrage Decision
Figure 4.1 Stock Price of Unisource after the Collapse of the Merger
Figure 4.2 Typical Breakup Fees for Targets of Different Sizes across All Transactions
Figure 4.3 Typical Breakup Fees for Targets of Different Sizes Only for Transactions That Have Breakup Fees
Figure 4.4 Percentage of Transactions with Breakup Fees. (a) $50–500 Million. (b) >$500 Million
Figure 4.5 Prevalence of Breakup Fees. Percentage of Transactions That Contain Breakup Fees for (a) U.S. Mergers with an Announcement Value between $50 and $500 Million (b) Announcement Value of More Than $500 Million
Figure 4.6 Evolution of Breakup Fees for (a) U.S. Mergers with an Announcement Value between $50 and $500 Million (b) Announcement Value of More Than $500 Million
Figure 4.7 Canadian Breakup Fees. (a) Prevalence of Breakup Fees (b) Level of Breakup Fees
Figure 4.8 U.K. Breakup Fees: (a) Prevalence of Breakup Fees (b) Level of Breakup Fees
Figure 4.9 Autonomy Prior to Its Acquisition by HP
Figure 4.10 Pinnacle Resources and Quest Resource Corp. after the Canceled Merger
Figure 4.11 Evolution of Acquisition Premia
Chapter 5: Sources of Risk and Return
Figure 5.1 Evolution of the Spread of the Autonomy Merger
Figure 5.2 Price (left scale; line) and Volume (right scale, in thousands; bars) Chart of Autonomy Common Stock
Figure 5.3 Volume Chart of Trustreet Series C Preferred Stock
Figure 5.4 Order Book for MCG Capital
Figure 5.5 Order Book for Mylan NV
Figure 5.6 Lafarge North America
Figure 5.7 Covered Call Writing
Figure 5.8 (a) Implied Volatility and (b) Option Trading Volume of Superior Essex Inc.
Figure 5.9 Stock Price of Anheuser-Busch Cos.
Figure 5.10 Stock Price of Genentech and the S&P 500 Index
Figure 5.11 Bidding War over 3PAR
Chapter 6: Deal Structures: Mergers and Tender Offers
Figure 6.1 Direct Merger
Figure 6.2(a) Forward Triangular Merger
Figure 6.2(b) Reverse Triangular Merger
Chapter 7: Financing
Figure 7.1 Verenium's Stock Price after BASF's Acquisition Proposal
Figure 7.2 Price of the Sanofi/Genzyme CVR
Figure 7.3 Leveraged Loans: All in Spreads
Chapter 8: Legal Aspects
Figure 8.1 Legal Universes for Mergers and Acquisitions
Figure 8.2 Price of the ISS Global A/S 4.75% Bond Due 09/10
Figure 8.3(a) Timetable for “schemes of arrangement” under the Takeover Code with relevant rules of the Takeover Code or Section of the Companies Act
Figure 8.3(b) Timetable for takeover offers under the Takeover Code with relevant rules of the Takeover Code or Section of the Companies Act
Figure 8.4(a) Timetable for Takeovers in Switzerland
Figure 8.4(b) Timetable for Takeovers in Italy
Chapter 10: Buyouts by Private Equity
Figure 10.1 Stock Price of Merisel at the Time of American Capital Strategies' Acquisition Proposal
Chapter 11: Minority Squeeze-Outs
Figure 11.1 Stock Price of infoUSA after the 2005 Earnings Release and Gupta's Acquisition Proposal
Figure 11.2 infoUSA's Stock Price, 2006–2008
Figure 11.3 Chapparal Resources
Chapter 12: Government Involvement
Figure 12.1 Stock Price of Esmark
Chapter 13: Four Ways to Fight Abuse of Shareholders in Mergers
Figure 13.1 Late Stages of a Company's Life
Figure 13.2 Number of Annual Activist Merger Arbitrage Events (U.S. Mergers Only)
Chapter 14: Investing in Arbitrage
Figure 14.1 Leverage Coupled with Short Selling Leads to Negative Alpha
Figure 14.2 Fees and Short Sale Activity (Utilization of Shares Available) around Dividend Payments
Figure 14.3 Frequency of Merger Closings by Calendar Month, 1990–2013
Figure 14.4 Performance of the IQ Index and S&P Merger Arbitrage Indices Relative to Other Asset Classes
Figure 14.5 Risk/Return Trade-off for the S&P Merger Arbitrage Index Since Its Inception
List of Tables
Chapter 1: Introduction to Merger Arbitrage
Table 1.1 Orders of Arbitrage
Chapter 2: The Mechanics of Merger Arbitrage
Table 2.1 Cash Flows in CGA/B2Gold Merger
Table 2.2 Losses Suffered at a Constant Percentage Spread in a Rising Market
Chapter 3: The Role of Merger Arbitrage in a Diversified Portfolio
Table 3.1 Correlation of Merger Arbitrage Spreads to Different Interest Rates
Table 3.2 Merger Arbitrage Returns for Different Portfolios
Table 3.3 Statistics of Monthly Return for Merger Arbitrage Hedge Fund Indices Compared to Stocks and Bonds over a Quarter Century, 1990–2014
Table 3.4 CAPM
*
Statistics of the Merger Arbitrage Hedge Fund Indices, Relative to the S&P 500
Table 3.5 Various Downside Risk Measures
Table 3.6 Ranking of Merger Arbitrage Relative to Traditional Investment Strategies
Table 3.7 Ranking of Merger Arbitrage Relative to Other Hedge Fund Strategies
Table 3.8 Performance of Merger Arbitrage Prior to Quantitative Easing (1990–2008)
Chapter 4: Incorporating Risk into the Arbitrage Decision
Table 4.1 Failure Rates of Mergers According to Fich and Stefanescu
Table 4.2(a) Average Breakup Fees for Completed and Canceled U.S. Mergers with an Announcement Value between $50 and $500 Million
Table 4.2(b) Average Breakup Fees for Completed and Canceled U.S. Mergers with an Announcement Value of More Than $500 Million
Table 4.3 Average Acquisition Premia over the period 1995-2013
Chapter 5: Sources of Risk and Return
Table 5.1 Arbitrageurs' Holdings of Target Company Stock in Selected Mergers
Table 5.2 Time Periods Required to Close a Merger in the United States, by Industry
Table 5.3 Time until the Collapse of U.S. Mergers, by Industry
Table 5.4(a) Timing of Public Company Mergers in Canada
Table 5.4(b) Timing of Public Company Mergers in the United Kingdom
Table 5.4(c) Timing of Public Company Mergers in Australia
Table 5.4(d) Timing of Public Company Mergers in France, Austria, and Germany
Table 5.5 Improvement in the Arbitrage Spread of the CGI Mining/B2Gold Stock-for-Stock Merger for Different Levels of Short Rebates
Table 5.6 Overview of Spreads from Examples in Chapter 2
Table 5.7 The World's 20 Largest Completed Hostile Takeover Transactions, through Year-End 2014
Chapter 6: Deal Structures: Mergers and Tender Offers
Table 6.1 Mergers and Tender offers in several common law jurisdictions
Table 6.2 Timing in Mergers and Tender Offers, 1980–2005
Table 6.3 Cumulative Abnormal Stock Returns to Targets and Bidders (Individually and Combined) Relative to the Initial Bid Date
Table 6.4 SEC Filings Made by Acquirers and Targets in Tender Offers and Mergers
Chapter 7: Financing
Table 7.1 Milestone Payments of the Sanofi/Genzyme CVR
Chapter 8: Legal Aspects
Table 8.1 Key Characteristics of Mandatory Takeover Rules
Chapter 11: Minority Squeeze-Outs
Table 11.1 Squeeze-Out Thresholds around the World
Chapter 12: Government Involvement
Table 12.1 HSR Transactions, Second Requests, and Merger Enforcement Actions from 2004 to 2013
Table 12.2 FTC Horizontal Merger Investigations: Post-Merger HHI and Change in HHI (Delta), FY 1996–FY 2011 (Enforced/Closed)
Table 12.3 Banking Market in Metropolitan New York, as Seen by the St. Louis Fed's CASSIDI System (top 20)
Table 12.4 Effect of the Wells Fargo/Wachovia Merger in the Metropolitan New York Market on Competition
Table 12.5 Notification Thresholds in Select European Countries
Chapter 13: Four Ways to Fight Abuse of Shareholders in Mergers
Table 13.1 Outcome of Appraisal Actions
Chapter 14: Investing in Arbitrage
Table 14.1 Implied Probabilities of the Closing of Mergers Derived from Option Prices
Table 14.2 Negative Alpha for Different Levels of Leverage, Interest Rate Spreads, and Withdrawal Levels from the Brokerage
Table 14.3 Performance (percentage per calendar year) of Short Biased Hedge Funds According to HFRI
Table 14.4 Fees and Returns Earned by Lenders of Securities
Table 14.5 Index Scenario Probabilities
Table 14.6 Statistics of Monthly Returns of the IQ Index and S&P Merger Arbitrage Indices
Table 14.7 Various Downside Risk Measures
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