Merger Arbitrage: How to Profit from Event-Driven Arbitrage

Overview

Merger Arbitrage is the definitive book on one of the most effective forms of arbitrage. Organized into three comprehensive parts, this reliable resource introduces you to the basics of the arbitrage process in Part One, discusses the possible pitfalls of the approach in Part Two, and deals with some practical questions of investing in merger arbitrage in Part Three.

Filled with in-depth insights and expert advice, this timely guide goes beyond the description of the arbitrage ...

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Overview

Merger Arbitrage is the definitive book on one of the most effective forms of arbitrage. Organized into three comprehensive parts, this reliable resource introduces you to the basics of the arbitrage process in Part One, discusses the possible pitfalls of the approach in Part Two, and deals with some practical questions of investing in merger arbitrage in Part Three.

Filled with in-depth insights and expert advice, this timely guide goes beyond the description of the arbitrage process to examine the benefits of adding merger arbitrage to your portfolio, while introducing you to the vehicles that can be used to incorporate this strategy into your everyday investment endeavors.

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Product Details

  • ISBN-13: 9780470371978
  • Publisher: Wiley
  • Publication date: 8/3/2009
  • Series: Wiley Finance Series , #472
  • Edition number: 1
  • Pages: 355
  • Sales rank: 1,446,322
  • Product dimensions: 6.30 (w) x 9.10 (h) x 1.30 (d)

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 Dipl¿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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