Merger Arbitrage: How to Profit from Event-Driven Arbitrage

Overview

Mitigate risk and increase returns with an alternative hedgefund strategy

Merger Arbitrage: How to Profit from Event-Driven Arbitrage,Second Edition is the definitive guide to the ins and outs ofthe burgeoning merger arbitrage hedge fund strategy, withreal-world examples that illustrate how mergers work and how totake advantage of them. Author Thomas Kirchner, founder of thePennsylvania Avenue Event-Driven Fund, discusses the factors thatdrove him to invest solely in merger ...

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Overview

Mitigate risk and increase returns with an alternative hedgefund strategy

Merger Arbitrage: How to Profit from Event-Driven Arbitrage,Second Edition is the definitive guide to the ins and outs ofthe burgeoning merger arbitrage hedge fund strategy, withreal-world examples that illustrate how mergers work and how totake advantage of them. Author Thomas Kirchner, founder of thePennsylvania Avenue Event-Driven Fund, discusses the factors thatdrove him to invest solely in merger arbitrage and otherevent-driven strategies, and details the methods used toincorporate merger arbitrage into traditional investmentstrategies.

And while there is always a risk that a deal will fall through,the book explains how minimal such risks really are when thepotential upside is factored in. Early chapters of the book focuson the basics of the merger arbitrage strategy, including anexamination of mergers and the incorporation of risk into thearbitrage decision. Following chapters detail deal structures,financing, and legal aspects to provide the type of in-depthknowledge required to execute an effective investment strategy. Theupdated second edition stresses new, increasingly relevantinformation like:

  • Worldwide legal deal regimes
  • UK takeover code
  • UK takeover code global offspring
  • Regulators around the world

The book provides clear, concise guidance on criticalconsiderations including leverage and options, shorting stocks, andlegal recourse for inadequate merger consideration, allowingreaders to feel confident about trying a new investment strategy.With simple benefits including diversification of risk and returnstreams, this alternative hedge fund strategy has a place in eventhe most traditional plan. Merger Arbitrage: How to Profit fromEvent-Driven Arbitrage, Second Edition provides the informationthat gives investors an edge in the merger arbitrage arena.

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Product Details

  • ISBN-13: 9781118736357
  • Publisher: Wiley
  • Publication date: 8/24/2015
  • Series: Wiley Finance Series
  • Edition number: 2
  • Pages: 352

Meet the Author

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 DiplĂ´me from the Institut d'Etudes Politiques de Paris (Sciences Po), and an MBA from the University of Chicago Booth School of Business.

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Table of Contents

Preface ix

Acknowledgements xii

Part 1 The Arbitrage Process 1

Chapter 1 Introduction to Merger Arbitrage 3

Cash Mergers 12

Stock-for-Stock Mergers 19

Chapter 2 Incorporating Risk into the Arbitrage Decision 43

Probability of Closing 45

Severity of Losses 60

Expected Return of the Arbitrage 68

Chapter 3 Sources of Risk and Return 71

Deal Spread 71

Two Aspects of Liquidity 73

Timing and Speed of Closing 80

Dividends 87

Short Sales as a Hedge and an Element of Return 90

Leverage Boosts Returns 93

Covered Call Writing 95

Commissions and Portfolio Turnover 98

Bidding Wars and Hostile Bids 100

Chapter 4 Deal Structures: Mergers and Tender Offers 103

Mergers 103

Tender Offers 108

Comparison of Mergers and Tender Offers 109

Part 2 Pitfalls of Merger Arbitrage 117

Chapter 5 Financing 119

Types of Debt Funding 122

Financing of Mergers versus Tender Offers 130

Uncertain Merger Consideration 131

Conflicted Role of Investment Banks 135

Fairness Opinions 140

Systemic Risk 142

Chapter 6 Legal Aspects 145

Merger Process 148

Takeover Defenses 156

Chapter 7 Management Incentives 163

Management Compensation 165

Continuing Management Interest in Private Equity Buyouts 171

Long-Term Planning in Management Buyouts 173

Milking a Company through Related Party Transactions 182

Chapter 8 Buyouts by Private Equity 187

Private Equity's Advantage 188

CEOs Don't Want to Sell to the Highest Bidder 191

Private Equity Funds Have Their Own Agenda 193

Buyouts as Financial Engineering 196

Chapter 9 Minority Squeeze-outs 199

Boards Lack Effectiveness During Squeeze-outs 200

Minority Shareholders Are in a Tough Spot 202

FamilyControl 210

Chapter 10 Government Involvement 213

Antitrust Enforcement 213

SEC's Approach to Regulation 223

State Governments 231

Federal Government 236

Trade Unions 240

Chapter 11 Four Ways to Fight Abuse of Shareholders in Mergers 243

"Just Sell" Is for Losers 243

Case for Activist Merger Arbitrage 246

Legal Tactics 248

Public Opposition 262

Part 3 Investing in Merger Arbitrage 265

Chapter 12 The Role of Merger Arbitrage in a Diversified Portfolio 267

Volatility of Stocks Going through a Merger 268

Return and Correlation Characteristics of Merger Arbitrage 272

Merger Arbitrage outside the United States 278

Risk and Return of Merger Arbitrage Funds 282

Benefits of Merger Arbitrage in a Diversified Portfolio 292

Chapter 13 Investing in Arbitrage 301

Trading versus Investing 301

Leverage and Options 302

Shorting Stocks 309

Transaction Costs 315

Managing the Cash Position 318

Risk Management 325

Standard & Poor's Merger Arbitrage Index 329

Separate Accounts 331

Hedge Funds and Mutual Funds 333

Notes 339

About the Author 346

Index 347

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