Risk Arbitrage

Risk Arbitrage was originally the subject of the author’s MBA Thesis at the Graduate School of Business Administration New York University in June, 1969. It was re-edited and published in The Bulletin of the Institute of Finance in May, 1971. It was republished by Salomon Brothers Center for the Study of Financial Institutions at the Graduate School of Business Administration New York University in 1982. This updated version of Risk Arbitrage follows the development of the arbitrage community from the 1970s to the present time. A new chapter—“Active Arbitrage”—has been added to reflect the incipient melding of arbitrage and activism as a new art form. The point of view of this work and its content reflects the author’s practical experience as an arbitrageur/shareholder activist.

Derivation of Risk Arbitrage 1 The Arbitrage Community 4 A Changing Community from the 1970s to 2000

Merger Arbitrage 

General 

Gathering Information 

Figuring of Parities 

Determination of the Time Element 

Return on Investment 

The Risks 

Average Expected Returns 

Taking a Position 

Turning a Position 

Consummation 

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

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

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