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Risk Arbitrage Guy P. Wyser-Pratte Finance/Investing Wiley Investment Classics Praise for RISK ARBITRAGE WYSER-PRATTE “Guy Wyser-Pratte’s timeless classic, Risk Arbitrage, continues to be a resource for the arbitrage community. The addition of a section on activism brings the original work into the modern day.” — Peter Schoenfeld, Chairman & CEO, P. Schoenfeld Asset Management LLC “[Wyser-Pratte is] the dean of the arbitrage community.” “Guy Wyser-Pratte’s classic MBA thesis provided a beacon of light to the murky —The Wall Street Journal world of arbitrage. It was a must-read for me when I fi rst started my business in 1976, and this updated book is a must-read today for a new generation of investors seeking absolute returns for all seasons.” —Mario J. Gabelli, Chairman, Gabelli Funds, Inc. Arbitrage—the act of buying an article in one market and selling it in another—has RISK ARBITRAGE 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. 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- RISK trage—with a clear focus on merger arbitrage—and how it has been used over the years, as well as in modern markets. Covering everything from average expected returns to corporate freeze-ins, this book also 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- ARBITRAGE ..........................have guide for every serious investment professional and savvy individual investor. GUY P. WYSER-PRATTE, MBA, is a leading activist hedge fund manager and considered by many to be the founding father of shareholder activism. Since 1991, he has run Wyser-Pratte & Co., which has racked up impressive returns of 25 percent an- nually. He is the recipient of the Alternative Investment News 2007 Lifetime Achieve- ment Award and is a frequent speaker at investment conferences. Cover Images: Corbis $19.95 USA/$21.95 CAN . GUY P. W YSER-PRATTE P1: OTE/PGN P2: OTE FM JWBT026-Wyser November 11, 2008 14:46 Printer Name: Yet to Come P1: OTE/PGN P2: OTE FM JWBT026-Wyser November 11, 2008 14:46 Printer Name: Yet to Come Risk Arbitrage i P1: OTE/PGN P2: OTE FM JWBT026-Wyser November 11, 2008 14:46 Printer Name: Yet to Come Introducing Wiley Investment Classics There are certain books that have redefined the way we see the worlds of finance and investing—books that deserve a place on every investor’s shelf. Wiley Investment Classics will introduce you to these memorable books, which are just as relevant and vital today as when they were first published. Open a Wiley Investment Classic and rediscover the proven strate- gies, market philosophies, and definitive techniques that continue to stand the test of time. Books in the series include: Only Yesterday: An Informal History of the 1920’s Frederick Lewis Allen Lombard Street: A Description of the Money Market Walter Bagehot The Go-Go Years: The Drama and Crashing Finale of Wall Street’s Bullish 60s John Brooks Fifty Years in Wall Street Henry Clews Value Averaging: The Safe and Easy Strategy for Higher Investment Returns Michael E. Edleson Common Stocks and Uncommon Profits and Other Writings Philip A. Fisher Paths to Wealth Through Common Stocks Philip A. Fisher Extraordinary Popular Delusions and the Madness of Crowds by Charles Mackay and Confusion de Confusiones´ by Joseph de la Vega Martin S. Fridson, Ed. Where the Money Grows and Anatomy of the Bubble Garet Garrett Manias, Panics, and Crashes: A History of Financial Crises Charles P. Kindleberger and Robert Aliber Reminiscences of a Stock Operator Edwin Lefevre` The Battle for Investment Survival Gerald M. Loeb A Fool and His Money: The Odyssey of an Average Investor John Rothchild The Common Sense of Money and Investments Merryle Stanley Rukeyser Where are the Customers’ Yachts? or A Good Hard Look at Wall Street Fred Schwed, Jr. The Aggressive Conservative Investor Martin J. Whitman and Martin Shubik ii P1: OTE/PGN P2: OTE FM JWBT026-Wyser November 11, 2008 14:46 Printer Name: Yet to Come Risk Arbitrage Guy P. Wyser-Pratte John Wiley & Sons, Inc. iii P1: OTE/PGN P2: OTE FM JWBT026-Wyser November 11, 2008 14:46 Printer Name: Yet to Come Copyright C 2009 by Guy Wyser-Pratte. All rights reserved. Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 750-4470, or on the web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at http://www.wiley.com/go/permissions. Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages. For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at (800) 762-2974, outside the United States at (317) 572-3993 or fax (317) 572-4002. Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books. For more information about Wiley products, visit our web site at www.wiley.com. Library of Congress Cataloging-in-Publication Data: Wyser-Pratte, Guy P. Risk arbitrage / Guy Wyser-Pratte. p. cm. – (Wiley investment classics) Rev. ed. of: Risk arbitrage II. [c1982]. Includes bibliographical references and index. ISBN 978-0-470-41571-9 (pbk.) 1. Arbitrage. 2. Consolidation and merger of corporations. 3. Tender offers (Securities) I. Wyser-Pratte, Guy P. Risk arbitrage II. II. Title. HG6041.W97 2009 658.155–dc22 2008047000 Printed in the United States of America 10987654321 iv P1: OTE/PGN P2: OTE FM JWBT026-Wyser November 11, 2008 14:46 Printer Name: Yet to Come 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 v P1: OTE/PGN P2: OTE FM JWBT026-Wyser November 11, 2008 14:46 Printer Name: Yet to Come 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 P1: OTE/PGN P2: OTE FM JWBT026-Wyser November 11, 2008 14:46 Printer Name: Yet to Come 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
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