omas Kirchner
Merger Arbitrage
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Merger Arbitrage
How to Profit from Global Event-Driven Arbitrage
Second Edition
THOMAS KIRCHNER
Copyright © 2016 by Thomas Kirchner. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.
The First Edition of this book was published by John Wiley & Sons, Inc. in 2009.
Published simultaneously in Canada.
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Library of Congress Cataloging-in-Publication Data:
Names: Kirchner, Thomas, 1968–author.
Title: Merger arbitrage: how to profit from event-driven arbitrage / Thomas Kirchner.
Description: Second edition. | Hoboken, New Jersey: John Wiley & Sons, Inc., [2016] | Series: Wiley finance | Includes index.
Identifiers: LCCN 2015046839 (print) | LCCN 2016002279 (ebook) | ISBN 9781118736357 (hardback) | ISBN 9781118736807 (pdf) | ISBN 9781118736661 (epub)
Subjects: LCSH: Arbitrage. | Consolidation and merger of corporations. | Stock exchanges and current events. | BISAC: BUSINESS & ECONOMICS / Finance.
Classification: LCC HG4521 .K48 2016 (print) | LCC HG4521 (ebook) | DDC 332.63/2 – dc23
LC record available at http://lccn.loc.gov/2015046839
Cover Design: Wiley
Cover Image: ©VladKol / iStockphoto
Preface
Since the first edition of this book interest rates have fallen to near zero and have dragged returns on merger arbitrage with them. With the foreseeable end of the Federal Reserve's zero interest rate policy it is likely that investors will allocate to merger arbitrage again in the near future. This book is written as a guide to potential investors who seek to understand the strategy better prior to committing an investment, investors who may have an allocation to merger arbitrage through model portfolios or maybe even their pension plan, as well as aspiring arbitrageurs.
Merger arbitrage, also known as risk arbitrage, has grown exponentially since the 1980s from small operations within Wall Street firms to standalone arbitrage funds directly accessible to the public. Yet, surprisingly little has been written on the topic. A number of academics have written studies about various aspects of the strategy. For the general public, I can count only six books on the topic. This small number pales in comparison to the information overload that other areas of finance experience. Since Guy Wyser-Pratte's two monographs in the 1970s, only three other books about merger arbitrage have been published. One of them is Ivan Boesky's Merger Mania. Maybe potential writers fear that authoring a merger arbitrage book stands under a bad omen because Boesky was arrested a few weeks after the publication of his book. As the author of a merger arbitrage book, I certainly hope that writing a book and getting arrested are linked only by correlation and not causality.
In this book I try to go beyond a mere description of the arbitrage process to incorporate some thoughts on the benefits of adding merger arbitrage to an investment portfolio, and the vehicles that investors can utilize to access the strategy. The expansion of the book's horizon will make it more relevant to a broader investment audience. Nevertheless, the focus of the book remains on mergers and merger arbitrage and not asset allocation or portfolio management.
The book is organized into three parts: the first three chapters introduce the basics of the arbitrage process and explain the benefits of the investment strategy in the context of a portfolio allocation. Chapters 4 to 8 discuss more details about the analysis involved in an arbitrage decision. Chapters 9 to 11 discuss special transactions that warrant particular diligence by arbitrageurs. Chapters 12 to 14 address additional regulatory aspects as well as practical considerations, including measures arbitrageurs can take to defend their interests, such as exercising appraisal rights.
The first two chapters explain the basic types of mergers and how to set up the arbitrage.
Chapter 3 is an interlude that explains the historical performance of merger arbitrage as an investment strategy, and how it can be added to a diversified portfolio. This chapter in particular will be relevant for investors who are looking to add merger arbitrage to their portfolio.
Chapter 4 expands the basic arbitrage by incorporating risk. Probabilities of failure and potential losses are incorporated into the return calculation to find an expected return of the arbitrage. Chapter 5 discusses different sources of risk and return in more detail, in particular the timing of mergers, leverage, and short sales.
The difference between mergers and tender offers is not well understood by many investment professionals. The terms are often used interchangeably. Chapter 6 goes into details and should be of interest to all investors, not just those seeking to read up on merger arbitrage.
Financing