Risk Arbitrage

305 Pages·2009·2.33 MB·English

by  Guy Wyser-Pratte

Finance/Investing
Wiley Investment Classics
RISK ARBITRAGE
Praise for
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“Guy Wyser-Pratte’s timeless classic, Risk Arbitrage, continues to be a resource for Y
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the arbitrage community. The addition of a section on activism brings the original E
work into the modern day.” R
“[Wyser-Pratte is] the dean of the arbitrage community.”
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— Peter Schoenfeld, Chairman & CEO, P. Schoenfeld Asset Management LLC P
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—The Wall Street Journal
“Guy Wyser-Pratte’s classic MBA thesis provided a beacon of light to the murky A
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world of arbitrage. It was a must-read for me when I fi rst started my business
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in 1976, and this updated book is a must-read today for a new generation of E
investors seeking absolute returns for all seasons.”
—Mario J. Gabelli, Chairman, Gabelli Funds, Inc.
RISK
Arbitrage—the act of buying an article in one market and selling it in another—has R
been a popular investment strategy for as long as people have been trading. Originally
published in 1971, Risk Arbitrage is the classic text on arbitrage strategies. I
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Written by leading activist fund manager Guy Wyser-Pratte, also known as “the dean
of the arbitrage community,” this book provides an unparalleled overview of risk arbi-
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trage—with a clear focus on merger arbitrage—and how it has been used over the years,
as well as in modern markets. ARBITRAGE

Covering everything from average expected returns to corporate freeze-ins, this book also A
introduces a new chapter on “active arbitrage” that shows the morphing of activism and
arbitrage. Illuminated by real-world examples and case studies, Risk Arbitrage is a must- R
. . h.ave. gui.de f.or e.very. ser.iou.s inv.estm.en.t pr.ofes.sion.al a.nd .savv.y in.divi.dua.l inv.esto.r. . .
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GUY P. WYSER-PRATTE, MBA, is a leading activist hedge fund manager and I
considered by many to be the founding father of shareholder activism. Since 1991, he T
has run Wyser-Pratte & Co., which has racked up impressive returns of 25 percent an-
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nually. He is the recipient of the Alternative Investment News 2007 Lifetime Achieve-
ment Award and is a frequent speaker at investment conferences.
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Cover Images: Corbis
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$19.95 USA/$21.95 CAN . . . . . . . . . . . . . . . . . . . . . . .
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G P. W -P
UY YSER RATTE
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Risk Arbitrage
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Introducing Wiley Investment Classics
There are certain books that have redefined the way we see the worlds of finance and
investing—booksthatdeserveaplaceoneveryinvestor’sshelf.WileyInvestmentClassicswill
introduceyoutothesememorablebooks,whicharejustasrelevantandvitaltodayaswhen
theywerefirstpublished.OpenaWileyInvestmentClassicandrediscovertheprovenstrate-
gies,marketphilosophies,anddefinitivetechniquesthatcontinuetostandthetestoftime.
Booksintheseriesinclude:
OnlyYesterday:AnInformalHistoryofthe1920’s
FrederickLewisAllen
LombardStreet:ADescriptionoftheMoneyMarket
WalterBagehot
TheGo-GoYears:TheDramaandCrashingFinaleofWallStreet’sBullish60s
JohnBrooks
FiftyYearsinWallStreet
HenryClews
ValueAveraging:TheSafeandEasyStrategyforHigherInvestmentReturns
MichaelE.Edleson
CommonStocksandUncommonProfitsandOtherWritings
PhilipA.Fisher
PathstoWealthThroughCommonStocks
PhilipA.Fisher
ExtraordinaryPopularDelusionsandtheMadnessofCrowdsbyCharlesMackayandConfusion
deConfusio´nesbyJosephdelaVega
MartinS.Fridson,Ed.
WheretheMoneyGrowsandAnatomyoftheBubble
GaretGarrett
Manias,Panics,andCrashes:AHistoryofFinancialCrises
CharlesP.KindlebergerandRobertAliber
ReminiscencesofaStockOperator
EdwinLefe`vre
TheBattleforInvestmentSurvival
GeraldM.Loeb
AFoolandHisMoney:TheOdysseyofanAverageInvestor
JohnRothchild
TheCommonSenseofMoneyandInvestments
MerryleStanleyRukeyser
WherearetheCustomers’Yachts?orAGoodHardLookatWallStreet
FredSchwed,Jr.
TheAggressiveConservativeInvestor
MartinJ.WhitmanandMartinShubik
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Risk Arbitrage
Guy P. Wyser-Pratte
John Wiley & Sons, Inc.
iii
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Copyright(cid:1)C 2009byGuyWyser-Pratte.Allrightsreserved.
PublishedbyJohnWiley&Sons,Inc.,Hoboken,NewJersey.
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LibraryofCongressCataloging-in-PublicationData:
Wyser-Pratte,GuyP.
Riskarbitrage/GuyWyser-Pratte.
p.cm.–(Wileyinvestmentclassics)
Rev.ed.of:RiskarbitrageII.[c1982].
Includesbibliographicalreferencesandindex.
ISBN978-0-470-41571-9(pbk.)
1.Arbitrage. 2.Consolidationandmergerofcorporations. 3.Tenderoffers
(Securities) I.Wyser-Pratte,GuyP.RiskarbitrageII. II.Title.
HG6041.W972009
658.15(cid:2)5–dc22
2008047000
PrintedintheUnitedStatesofAmerica
10 9 8 7 6 5 4 3 2 1
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Contents
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
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vi CONTENTS
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
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Contents vii
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
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viii CONTENTS
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