Merger Arbitrage; A Fundamental Approach to Event-Driven Investing

A wave of corporate mergers, acquisitions, restructuring, and similar transactions has created unprecedented opportunities for those versed in contemporary risk arbitrage techniques. At the same time, the nature of the merger wave has lent such transactions… (More) A wave of corporate mergers, acquisitions, restructuring, and similar transactions has created unprecedented opportunities for those versed in contemporary risk arbitrage techniques. At the same time, the nature of the merger wave has lent such transactions a much higher degree of predictability than ever before, making risk arbitrage more attractive to investors. Surprisingly, there is little transparency and instruction for investors interested in learning the latest risk arbitrage techniques. Merger Arbitrage – A Fundamental Approach to Event-Driven Investing helps readers understand the inner workings of the strategy and hedge funds which engaged in this investment strategy.Merger arbitrage is one of the most commonly used strategies but paradoxically one of the least known. This book puts it in the spotlight and explains how fund managers are able to benefit from mergers and acquisitions. It describes how to implement this strategy, located at the crossroad of corporate finance and asset management, and where its risks lie through numerous topical examples.The book is split into three parts. The first part, examining the basis of merger arbitrage, looks at the key role of the market in takeover bids. It also assesses the major changes in the financial markets over recent years and their impact on M&A. Various M&A risk and return factors are also discussed, alongside the historical profitability of merger arbitrage, the different approaches used by fund managers and the results of academic studies on the subject. The second part of the book deals with the risk of an M&A transaction failing in terms of financing risk, competition issues, the legal aspects of merger agreements and administrative and political risks. The third part of the book examines specificities of M&A transactions, comprehensively covering hostile takeovers and leveraged buyouts. Each part contains many recent examples and case studies in order to show how the various theories and notions are put into practice.From researching prospects and determining positions, to hedging and trading tactics, Lionel Melka and Amit Shabi present the full complement of sophisticated risk arbitrage techniques, making Merger Arbitrage a must read for finance and investment professionals who want to take advantage of the nearly limitless opportunities afforded by today's rapidly changing global business environment. The book builds on its authors’ diverse backgrounds and common experience managing a merger arbitrage fund, providing readers with an enriching inside view on M&A operations. (Less)

Sections

1.4.2 Waves of M&A
CASE STUDY: The Alcan/Pechiney Deal
2.1 TYPES OF TRANSACTIONS
2.1.1 Cash transactions
2.1.2 All-share transactions
2.1.3 Mixed cash-and-share transactions
2.1.4 Collars
2.2 THE CHOICE OF PAYMENT METHOD
Risk and Return Factors
3.1 THE DIFFERENT OUTCOMES
3.1.1 The transaction is completed
3.1.1.1 The probability of success
3.1.1.2 Risks of failure
3.1.2 The transaction fails
3.1.2.1 Estimating failure
3.1.2.2 Estimating potential losses
3.1.4 Rival bids and bidding wars
3.2 M&A TIMETABLE
3.2.1.1 Takeovers
3.2.1.2 The unique case of tender offers
3.2.1.3 Mergers
3.2.2 Sector differences
The Merger Arbitrage Strategy
4.1 THE LONG-TERM PROFITABILITY OF THE STRATEGY
4.2 THE FACTORS THAT INFLUENCE RETURNS
4.3.1 The deal’s risk zone
4.3.2 The use of leverage
4.3.3 The use of options or bonds
4.3.4 Investment portfolio analysis
4.3.5 Portfolio concentration
4.3.6 The role of trading
4.3.7 Classiﬁcations
4.4 THE CONCLUSIONS OF ACADEMIC STUDIES
Analyzing the Risk of Failure
Financing Risk
5.1 THE DIFFERENT FINANCING METHODS
5.1.1 Revolving credit
5.1.2 Bridge loan
5.1.3 Term loan
5.1.4 Syndicated loan
5.1.5 Mezzanine loans
5.1.6 The bond market
5.1.7 Contingent value rights (CVRs)
5.2 THE LEGAL SECURITY OF THE FINANCING
5.2.1 The UK legal framework
5.2.2 The US legal framework
5.2.3 The European legal framework in general
CASE STUDY: The Dow Chemical/Rohm & Haas Deal
Competition Risk
6.1.1 United States
6.1.2 Europe
6.2 COMPETENT AUTHORITIES AND APPROVAL PROCESS
6.2.1 United States
6.2.2 Europe
6.2.3 China
6.3 COMPETITION REMEDIES
6.4 COUNTRY DIFFERENCES IN EVALUATION
CASE STUDY: The Oracle/Sun Deal
7.1 THE DIFFERENT DOCUMENTS
7.2 STRUCTURE OF A MERGER AGREEMENT
7.3 MAC CLAUSES
7.3.1 A negative deﬁnition of the MAC clause
7.3.2 MAC clauses and court decisions
7.3.3 MAC clauses and private-equity transactions
7.3.4 Why these clauses?
7.4 OTHER LEGAL CLAUSES
7.4.1 Go-shop clause
7.4.2 Break-up-fee clause
7.4.3 Matching-rights clause
7.4.4 Speciﬁc-performance clause
7.4.5 Dissenters’-rights clause
Other Risks
8.1 ADMINISTRATIVE AUTHORIZATIONS
8.1.1 United States
8.1.1.1 The role of the CFIUS
8.1.1.2 Sector authorities
8.1.1.3 PSCs
8.1.2 Canada
8.1.3 Europe
8.2 POLITICAL RISK
8.3 NATURAL-DISASTER RISK
8.4 THE RISK OF FRAUD OR FALSE ACCOUNTING
Hostile Transactions
9.1 A GENERAL OVERVIEW OF HOSTILE TRANSACTIONS
9.1.1 Proﬁle of the target company
9.1.2 The different parties involved in hostile offers
9.1.2.1 The buyer
9.1.2.3 Other potential buyers
9.1.2.4 Arbitrageurs
9.1.3 The offer strategies
9.1.3.1 Direct purchase on the market
9.1.3.2 Tender offer
9.1.3.4 Proxy contest
9.1.3.5 Legal battle
9.1.4 The matter of price
9.3 DEFENSE MECHANISMS
9.3.1 Preventive measures
9.3.1.1 Staggered vs unstaggered boards
9.3.1.2 Fair-price provision
9.3.1.3 Supermajority provision
9.3.1.4 Dual-class recapitalization
9.3.1.5 Golden parachutes
9.3.1.6 Employee stock ownership plans
9.3.1.7 Poison pill
9.3.2 Mechanisms adopted during an offer
9.3.2.1 The crown jewel defense
9.3.2.2 Litigation
9.3.2.3 Just say no
9.3.2.4 Countertender offer: Pac-Man
9.3.2.5 Asset restructuring
9.3.2.6 White knight and white squire
9.3.2.7 Going-private transaction/LBO
9.3.2.8 Greenmailing
9.4.1 The UK
9.4.2 Continental Europe
CASE STUDY: The Sanoﬁ/Genzyme Deal
Leveraged Buyouts
10.1 MAIN CHARACTERISTICS OF LBOs
10.1.1 Principles
10.1.2 The different parties

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01/29/2013

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