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Index

A American Capital Strategies (ACAS), ABN AMRO Holding NV, hostile 335–336, 336f acquisition, 180–181 American Community Properties Trust, Accipiter Capital Management, 114 filing, 283 Accounting principles, management American Depository Receipts (ADRs), choice, 315 trading, 290 Accounts, separation, 468–469 American Physicians Capital (ACAP), 114 Ackman, William, 186, 412 Anheuser-Busch Cos., 181f, 183 Acquisition, 137t, 138t, 188 Annualized after-tax return, 168 Actively managed portfolio, unmanaged Annualized net return, 139 index (usage), 95 Annualized return, 26f, 163 Active premium, 85 Annualized spread, increase, 37 Activist Antitrust, 367–382 appraisal rights, 416–427 problems (mergers), 112 class actions, 427–431 United States antitrust rules, 367–369, investor requests, 339 380 k legal tactics, 416–432 Appraisal actions k merger arbitrage, 412–416, 415f cases, 426 merger arbitrageurs, tactics, 414 time frame, 420 private equity replacement, 338–340 outcome, 422t–424t proxy campaigns, 433–434 Appraisal arbitrage, 418, 420 public opposition, 433–434 Appraisal rights, 416–427 rise, 411–412 Approximate Dynamic Programming (ADP), tender offers, shares (withholding), 434 usage, 458 Administrative Measures on the Acquisition Arbitrage, 3–5, 8–10, 8t of Listed Companies, 76 activity, selling pressure, 34 ADP. See Approximate Dynamic appraisal arbitrage, 418 Programming decision, risk (incorporation), 103 Advisory Research, Longs ownership, 434 expected return, 139–140 Aegis sale, 331 hedge funds, usage, 469–473 Aer Lingus Plc, International Consolidated indices, 463–468 Airlines Group, S.A. bid, 402 investment, 168, 435 A.G. Barr p.l.c. acquisition, 197 liquid alternatives, 469–473 Airtran Holdings, Inc., Southwest Airlines multiple arbitrage, 219, 337–338 Co. acquisition,COPYRIGHTED 47e–48e portfolio, MATERIAL construction, 66 Allergan Inc., 232, 412 positions (depression), annualized return Allserve Systems plc, 331 (impact), 163 Alpha, 70, 442 public intervention, 111–112 Alstom Economy, General Electric (hostile spread, 62, 171t approach), 402 term, 3, 18f Alterra Capital Holdings Ltd, Markel Corp. Arbitrage Fund (ARBFX), 95 acquisition (announcement), 38e–39e Arbitrageurs, 414 Amalgamation Agreement, 194–195 activities, curtailing, 9 Amalgamations, 188 cash, receipt, 454

497

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498 INDEX

Arbitrageurs (Continued) Bankers, role, 241 concentrated arbitrageurs, 77 Banks, 225–226, 240–246 diversified arbitrageurs, 77 Barclay hedge, 77–78 holdings, target company example, 154t Barclays Aggregate Bond Index, 89 legal aspects, 250 BASF acquisition proposal, 218f liquidity premium, earning, 146 Bass, Robert M., 242 participation, benefits, 153, 155 BCG Partners, press release, 327 returns, extension risk (impact), 163 Bergstein, David, 230 Arbitration, definition, 3 Berkshire Hathaway/3G Capital acquisition, ARCO Chemical, Lyondell Petrochemical reverse triangular merger, 193e–194e Company acquisition, 348 Bessemer Venture Partners, backing, 247 Arnhold & S. Bleichroeder, stock sale, 338 Best price rule, 286–287 Arrangement, 188 Beta+/Beta–, 83 schemes, 196–197, 196e–198e Bidders, 208t, 214, 331–333 Assets, 226–227 Bidding wars, 180–186, 185f acquisitions, poison pill alternative, 283 Bid/offer spreads, 151, 452 management, 79f Bid premium, impact, 105 monetization, 339 Black-Scholes Assets under management (AUM), strength, equation, 439 78, 80 model, 438 Asymmetric payoff distribution, 15f option prices, basis, 70 Atlas Corporation, Blasius Industries (court process, usage, 438–439 battle), 275 Block, Carson, 186 Atmi, Inc., 304e–310e Blunt, Matt, 386 Australian Corporations Act (2001), 32 BMO Financial Group (BMO), indicative k Australian Securities and Investments offer, 261 k Commission, Regulatory Guide 25 Board of directors, 270–271, 346–347 Takeovers, 268 fiduciary duties, 412–413 Australia, public company mergers staggered boards, impact, 280–281 (timing), 162t Bonds, 94f, 224–229 Austrian Traded Index (ATX) benchmark, 75 Bonomi, Andrea, 115 Austria, public company mergers Books/records, inspection, 431–432 (timing), 163t Borrow costs, increase (trading/ Autonomy Corporation, 18–19, 21–22 anticipation), 68 common stock, price/volume, 147f Borrowing, usage, 174, 437 daily price changes, 53f Borruso v. Communications Telesystems HP acquisition, 19e, 25, 51, 144, 163 Intern., 427 merger, spread (evolution), 145f Borse und Actien (Swoboda), 4–5 preacquisition stock level, 132f Branch, Ben, 73, 106 pre/postmerger announcement, stock Breakup fees, 118f–120f, 124f–127f, price, 20f 117–130 Avago Technologies, LSI Industries averages, 122t, 123t (agreement), 398 avoidance, 129 Average acquisition premia, 137t buyer breakup fees, 118 Average annualized merger arbitrage Cove Energy, Shell acquisition, 128e spread, 61e usage, 123, 125 AXA Private Equity, backing, 115 Bridge loans, 226–227 Bright line test, 204 British Energy Group plc, EDF acquisition, B 238 B2Gold Corp, CGI Mining Ltd merger, BritvicPLC,A.G.BarrPLCacquisition 27–28, 31f, 31t, 33f (arrangement scheme), 197e–198e Baker, Malcolm, 72 Broadridge, 433

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Index 499

Brokerage commissions, 450–452 CARs. See Cumulative abnormal returns Brokerage firms, revenue source, 37 Cash holdings, 454–455 Brokerage withdrawal levels, negative Cash management, 456–458 alpha, 443t Cash mergers, 16f, 17, 21f Broker/dealers, swap involvement, 441 capital, investment, 62 Brookfield DTLA Fund Office Trust Investor covered call writing, usage, 176 Inc., 149 percentage, 59f Brookfield Office Properties acquisition, 149 stock-for-stock mergers, contrast, 144 Brownian motion, 438 Cash position, management, 453–460 Burger King, 200e–201e, 207–209 Cash/stock, ratio, 41 Burton, Joan, 402 CASSIDI, 373 Busch IV, Adolphus A., 359 CCA Industries, Dubilier & Co. acquisition, Busch IV, August A., 359 13 Business conditions, changes, Cede & Co., 425, 433 108–110 Celanese AG, Blackstone acquisition, Business interruption fee, 121 337–338 Business judgment rule, 269 Celesio AG, 157, 221 Buy-and-hold strategy, 180 convertible note (terms/conditions), Buybacks (leveraged recapitalizations), 282 222e–223e Buyers, 18 Celesio AG/McKesson/Dragonfly, breakup fees, 118 domination/profit sharing agreement, control (concern), boards (impact), 343e–344e 345 Center for Research in Security Prices takeovers, 266, 266e–267e Buyer/target size (mergers), 112 (CRSP) data, 459 Central Freight, related party transactions, k Buyouts, 116, 188 k financial engineering, comparison, 324e–325e 336–338 CFD. See Contracts for difference private equity buyouts, 328 CFIUS. See Committee on Foreign Investments in the United States CGI Mining Ltd, B2Gold Corp. merger, 27–28, 169–170 C cash flows, 31t Cagle’s Inc., board (family letter), 359e–360e spread, evolution, 33f Callan Chart, 87 stock prices, 31f Canada CGI Mining Ltd, B2Gold Corp. breakup fees, 126f Investment in Canada, 398 stock-for-stock merger (arbitrage spread mergers, 122–123, 398–401 improvement), 171t net benefit test, 399 Change-of-control provinces, incorporation laws, 387–394 clauses, 253 public company mergers, timing, 160t covenants, 217 Canadian Pacific Railway, 340 provisions, 220–221, 359 Canadian Securities Administrators Change to Win (CtW), 407 (CSA), 401 union representation, 434 Cao, Charles, 155 Chapparal Resources, 352–354, 354f, 409 Capital, 77, 174, 339 Chasing returns, 436 Capital Asset Pricing Model (CAPM), 421 Chicago Board Options Exchange, 437 framework, usage, 83 Children’s Investment Fund (TCI), 397–398 model, 69–70 China risk measurements, 85 administrations, 403 statistics, 87t commissions, 403 Caracal Energy Inc., Glencore Xstrata plc companies, 117, 186–187 acquisition attempt, 287 laws, impact, 402–405

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500 INDEX

China (Continued) Corporations, 56, 256 Ministry of Commerce (MOFCOM), books/records, inspection, 431–432 403–405 tax policy, 382–384 National Development and Reform Correlation coefficients, 64–65 Commission (NDRC), 403 Correlation, importance, 51 State Council (China’s Cabinet), 403 Council Regulation (EC) No 139/2004, 381 CIBC financing, 333 Court decisions, impact, 252 Class actions, 427–431 Cove Energy, Shell acquisition filing, 429 (breakup fee), 128e Clayton Act of 1914, 56 Covered call writing, 174–177, 175f Clearing (brokerage commission), 451 Credit Agricole Structured Asset CLOs. See Collateralized loan obligations Management Center for International Closing, 105–130, 155–165 Securities and Derivatives Markets Club Med, management (talks), 115 (CASAM CISDM), 78, 80 CNMV. See Comision Nacional del Mercado Credit crunches, triggers, 248 de Valores Credit risk management, merger arbitrage Coast Financial Holdings, acquisition (comparison), 14–15 (merger consideration adjustment), Creeping acquisitions, prevention, 284, 286 233e–236e Creeping takeovers, 284–286 Coercion, forms, 345–346 Cross-border mergers, tax considerations, Cogent hedge, 78 383 Collars, 42–49 Cross-border transactions, 290–291 deals, 73 CSRC. See China Securities Regulatory Collateralized loan obligations (CLOs), 225 Commission Comision Nacional del Mercado de Valores CtW. See Change to Win k (CNMV), 264 Cumulative abnormal returns k Commissione Nazionale per le Societa e la (CARs), 207 Borsa (CONSOB), 264 Cumulative abnormal stock returns, 208t Commissions, 177–180 Customer relationship management (CRM) Committee on Foreign Investments in the label, 330 United States (CFIUS), 395–398 CVRs. See Contingent value rights Company Cypress Communications, Arcapita, Inc., books/records, inspection, 431–432 acquisition, 395 company-specific contracts, 253 control, 323–327, 355 life, late stages, 413f D Completion probability, bid premium Dai-Ichi Life Insurance Company, Tower (impact), 105 Australia (arrangement scheme), Compound interest, calculation, 24 196e–197e Conde, Cristobal, 312 Daily returns, 54f, 56f CONSOB. See Commissione Nazionale per Danisco A/S, E.I. du Pont de Nemours le Societa e la Borsa acquisition, 115 Constant percentage spread, losses, 35t Dark pools, 153 Contingent claims analysis, usage, 69 D.B. Zwirn & Co., 230 Contingent value rights (CVRs), 236–240, DDQs. See Due diligence questionnaires 238t Deal spread, 143–145 Contracts for difference (CFD), 442 Deal structures, 188 Convertible notes, terms/conditions, Debt funding, 220–232 222e–223e assets, 226–227 Cooper Chengshan Tire, joint venture, 408 bank loans, 225–226 Cooper Tire & Rubber Company, Apollo bonds, 226–229 Tyres takeover, 408 bridge loans, 226–227 Corporate Library, The, 347, 358–359 financing, 229–232

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Index 501

mezzanine debt, 227–228 E noncore businesses, sale, 227 Earnings before interest, taxes (EBIT), 247 selling shareholders, payment, 222 Earnings before interest, taxes, depreciation, target, balance sheet (cash availability), and amortization (EBITDA), 227 11, 237, 247 transaction costs, 222 eBay, 340 Debt repayment, control provisions (change), ECNs. See Electronic communication 220–221 networks de Carvalho-Heineken, Charlene, 355–356 Eddie Bauer Holdings, buyout, 276 Decision trees, usage, 140 EDGAR system, 210, 211, 216 DEFM14A filings, Wilshire Enterprises (table Efficient frontier, 94f, 97f of contents), 212e–213e Efficient market theory, 332 Delaware, General Corporate Law, 209, 431 Eisner, Michael, 332, 428 Delaware General Corporation Law Elan, Royalty Pharma hostile bid, 283 (DGCL), 202, 418–419, 256 Electronic communication networks Dell, 113–114, 340 (ECNs), 151, 153, 451 Dell, Michael, 340 Elliott Associates, 416 Delta hedging, 45, 73 El Paso/Kinder Morgan (KMI) merger, Delta-neutral hedging strategy, 49 percentage spread, 67f Derivatives, usage, 437 Empty voting, 446 Deutsche Bank, notes (issuance), 331 Energy Partners, LP acquisition, 40e Deutscher Aktienindex DAX, performance, Enron, 117, 323 75 Enterprise M&A Fund (EMAXX) DGCL. See Delaware General Corporation (EMAAX), 95, 97 Law Entire fairness, requirements, 271–272 k Directive on Takeovers, 258 Equity, 231–232, 312–315 k Direct merger, 190f Equity Office Properties Trust, Discounted cash flows (DCFs), 420–421 acquisition, 229 Diversification, importance, 89 Esmark, 405–406 Diversified portfolio, merger arbitrage, 51, Esmark, stock price, 407f 88–97 ETFs. See Exchange-traded funds Dividends, 166–169 Europe, 382t, 401–402 dividend-paying stocks, 143 European call option price, closed-form gross return, calculation, 38 solution (derivation), 438–439 payments, 449, 450f European civil law jurisdictions, 251 Dodd-Frank regulations, 305–306 European Commission (EC) Dolphin Limited Partnership, 349–350 rules, 251–252 Domination agreements, 342–343 European Union (EU), Takeover Code, 258 example, 343e–344e Evans, Edward P., 242–243 Double-taxation treaty, 464 Excess merger arbitrage returns, Dow Jones, NewsCorp bid, 281 71f, 74f Downmarkets, consideration, 70 Excess returns, 69, 73 Downside deviation, 87 Exchange Ratio, 44, 47 Downside risks, 137, 139 Exchange regulations, impact, measures, 88t, 467t 252–253 usage, 176 Exchange-traded funds (ETFs), 465 Dresser Rand Group, 12, 13f Execution fee (brokerage commission), 451 Dubai Ports World, P&O sale, 395 Execution-only brokers, arbitrageur Due diligence (mergers), 116–117, 333 confirmation requirement, 447 Due diligence questionnaires (DDQs), 436 Executives, payments, 305 Duquesne Light Co., preferred stock Exit rights, 291–292 series, 149 Exon-Florio Amendment, 395 Dynegy, due diligence process, 117 Extension risk, 163, 206

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502 INDEX

F Genesco, 109–110, 244–245 Fagan, Bill, 427 Genesis Healthcare, NCS (merger Fairness, 246–248, 269–270 agreement), 274–275 Fama-French three-factor model, 75 Germany, public company mergers Family control, 355–360 (timing), 163 Fastow, Andrew, 323 GFI Group, 199, 326–327, 326e F&C Asset Management plc, rumor Given Imaging Ltd, Covidien acquisition, response, 261e 289 Federal Deposit Insurance Corporation Glass-Steagall Act (1933), 240 (FDIC) filings, 373 Global merger legislation, types, 250 Fed Funds rate, basis, 446 Going-private transactions, 215–216 FEMSA (strategic investor), 356 Golden parachutes, 299, 306e–310e Fiat S.p.A., Chrysler (merger), 291–292 Goldie, Bradley A., 155 Fich, Eliezer, 72 Goldman Sachs Group, breakup fee Fidelity National divestitures/Lender (avoidance), 129 Processing Services merger, Federal Goldsmith, James, 276 Trade Commission announcement, 370e Goodman Global, Hellman & Friedman Fiduciary duty litigation, breach, 417 LLC acquisition, 230 Fiduciary out, 276 Gordon, Angelo, 430 Financial engineering, buyouts (comparison), Gordon dividend growth model, usage, 421 336–338 GrainCorp Limited, 25, 111, 166 Financing, 108, 217, 232 Gramm-Leach-Bliley Act of 1999, 240 Finley, Johan P., 231 Great Depression, 240 First Data, KKR buyout, 273 Greenwich Alternative Investments, Fixed-income arbitrage, 464 78 k Fixed-rate collar, implied options, 49 Gross return, calculation, 38 k Fixed-share collars, 42, 49e, 73 Gross spreads, 143 Fixed-value collars, 42, 47f Grupo Modelo, involvement, 184 Foodarama Supermarkets, shareholder GTECH, shareholder exit rights, 292 payment, 430 Guoco Group, Hong Leong Company Foreign Investment Review Agency, 399 acquisition, 268e, 356–357 Form 8-K, 210, 288 Gupta, Vinod, 349, 350–351, 350f Forward triangular merger, 190, 191f, 193e France, 163t, 262e, 266e–267e Francisco Partners, 312 H Fraud (mergers), 116–117 Haji-Ioannou, Stelios, 256 Freeze-out, 272, 282–283 Harper, Stephen, 400 FTC Horizontal, merger investigations, 374t Hart-Scott-Rodino Act, 202 Hart-Scott-Rodino Antitrust Improvements Act (1976) (HSR), 368, 369 G Health Care REIT, 44e, 45f GAAP. See Generally accepted accounting Hedge Fund Research (HFR), 78, 82–83, 94 principles Hedge Fund Research (HFRI/HFRX), 80 Gabelli Asset Management, 416 Hedge funds, 100f, 468–473 Gain deviation, 87 financing, 229–230 Gamco Investors, Inc., 417 monthly performance, 81f GARCH models, usage, 50 returns, 66, 77 Genentech, 183, 183f short biased hedge funds, performance, General collateral, trading, 66 444t General Corporate Law. See Delaware Hedges, short sales (comparison), 169–172 General Corporations Law. See Delaware Hedging, 45, 49 Generally accepted accounting principles Heine, Max, 95 (GAAP), 227, 245 Helaba Invest Kapitalanlagegesellschaft, 430

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Index 503

Hellman & Friedman LLC, 230 Inflection point, 98 Hennessee Group, 78 Information ratio, 85 Herfindahl-Hirschman Index (HHI), 372, Information Resources, acquisition, 236 374t Information statements, 209 Hewlett-Packard (HP), 19e, 184 infoUSA, 349–351, 350f, 352f Heyman, Samuel, 276 Ingersoll-Rand acquisition (account), 34e HFRI Equity Hedge Short Biased Index, Initial public offering (IPO), 314 444–445 Insider trading, 22–23 HFR Index, 94f Insight Venture Partners, backing, 247 High-yield bonds, redemption requirements, Interest, 24 221 Interest rates, 97–98, 99f, 100f Historical time series, spreads (calculation), components, 64 60e differential, 442 Historical volatility, 50 merger arbitrage spreads, correlation, 65t H.J. Heinz, Berkshire Hathaway/3G Capital spreads, negative alpha, 443t acquisition (reverse triangular merger), Interlocks, impact, 355 193e–194e Intermediate loans, usage, 226 Hockey, Joe, 111 Internal rate of return (IRR), calculation, Holding companies, 355–357 25–26 Hong Kong Stock Exchange, 355 Internal Revenue Code (IRC), 169, 192 Horizontal merger guidelines, 371 International anti-competition merger Ho, Stanley, 387 regulation, 380–382 Hostile bids, 14, 180–186 Investment Canada Act (ICA), 398–399 Hostile mergers, ubiquity, 116 Investment Company Act of 1940, 457, 472 Hostile takeover transactions, ranking, 182t Investments, 10–11, 472 k Hostile transactions, 105 accounts, separation, 468–469 k Hsieh, Jim, 155 banks, conflicted role, 240–246 HSR. See Hart-Scott-Rodino Antitrust long/short approach, 180 Improvements Act trading, contrast, 435–436 HSR Transactions/second requests/merger Investment strategies, 90t–93t, 179 enforcement actions, 371t IQ Index, 466f, 467t Hudson City Bancorp, M&T Bank IRAs. See Individual Retirement Accounts (merger), 373 ISDA agreements, 441–442 iShares Core Aggregate Bond (AGG), 95 ISS A/S buyout, 253 ISS Global A/S 4.75% Bond, price, 254f I ISS Global A/S acquisition, 221 IBP/Tyson Food decision (2001), 109 Italy, takeover timetables, 264f–265f ICA. See Investment Canada Act Icahn, Carl, 113–114, 276, 416 Idea generation (brokerage commission), 451 J Illiquid investments, 334 Jarvis, Geoffrey, 425 Illiquid stocks, liquidity premium J.C. Flowers, 121, 245 (arbitrageur earnings), 146 Jiang, Wei, 414, 418 Imaging Ltd./Coviden merger agreement, Jorion, Philippe, 462 voting conditions, 289e–290e Jump diffusion process, 438 Implied volatility, 177f Junk bonds, 228, 248 Incorporation laws, 385–394 Indemnification, 299 Independence Community Bank, K purchase, 116 Karolyi, Andrew, 75 Index membership, impact, 106 Kayak Software Corp., Priceline.com merger Index scenario probabilities, 465t agreement (forward triangular merger Individual Retirement Accounts (IRAs), 435 description), 193e

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504 INDEX

KBW, Inc., Stifel Financial Corp, 43–44, 43e Litigation, types, 428–429 Kelly, Patrick, 3 Loans, 225–226 Kinder Morgan (KMI)/El Paso merger, Local market price, acceptance, 9 percentage spread, 67f London Interbank Offered Rate (LIBOR), King Pharmaceuticals, Mylan Laboratories 24, 37, 77 (merger failure), 446 spread, 174, 226, 441 Knight Trading (NITE), 152 U.S. dollar LIBOR, basis, 464 Kohlberg Kravis Roberts (KKR), 129, Longs Drug Stores, CVS Caremark 243–244 (acquisition bid), 406–407, 434 Kravis, Henry, 276 Long/short merger arbitrage, gross return Kuwait Petroleum Corporation, (calculation), 38 stock sale, 338 Long-term capital gains, tax rate, 167 Long-term incentives, 298 L Long-term investors, interest (absence), 146 Lafarge North America, performance, 157f Long-term loans, usage, 226 Lafarge S.A., 156 Loss(es), 104, 130–139 L’Arche Green NV, 355–356 deviation, 87 Large-scale mergers, problems, 111 spreads, widening (impact), 163 Layered ownership structures, 358 Low-volatility strategy, 469 Lazard Freres, 242–243 LTV Corporation, bankruptcy, 248 LBOs. See Leveraged buyouts Leaseback financing, 229 Lefèvre payoff diagram, 16f M Legal aspects (mergers), 250 MacDonald Detwiller and Associates Legal tactics, 416–432 (MDA), Alliant Techsystems acquisition, k Lender Processing Services merger/Fidelity 399 k National divestitures, Federal Trade Macmillan, sale, 332 Commission announcement, 370e Macquarie Bank, 186 Leverage, 437–443 Maheswaran, Krishnan, 75 arbitrageur usage, 173 Managed Accounts Research (MAR), 78 impact, 172–174 Management, 315, 328 levels, negative alpha, 443t compensation, 298–312, 339 short selling, combination, 443f employment agreements, control usage, 473 provisions (change), 298–299 Leveraged buyouts (LBOs), 220, incentives, 293 245, 461 private equity buyouts, management Leveraged loans, 249f interest, 312–315 Leveraged recapitalizations (buybacks), 282 Management buyouts (MBOs), 220, 293, Levevre, Henri, 15 313–323 Lew, Jack, 398 Mandatory bids Lex Mercatoria, 3–4 acquisitions, 284–286 Liang, Bing, 155 rules, characteristics, 285t–286t Life Technologies Corporation, Thermo Margin borrowing, 473 Fisher acquisition, 165 Marked-to-market losses, 164, 357 Linear mean-variance analysis, Markel Corp., acquisition (announcement), inappropriateness, 70 38e–39e Lipper TASS, 78 Market, 451–453, 462 Lipton, Martin, 427 capitalization, 67, 148 Liquid alternatives, 469–473 manipulation, 287–292 Liquidity, 146–153 market-neutral investment strategies, 108 event, 410–411 participants, options, 21 representation, 453 Mark-to-market valuation, 452 Li, Tao, 414, 418 Martin Marietta, Bendix takeover, 281–282

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Index 505

Maryland Control Share Acquisition Act, transactions portfolio, 139 283 universe, 57–59 Material adverse change (MAC), 109–110, Merger closings, 105, 155–165, 158t, 440t, 121, 129–130, 244–245 454–455, 456f Material adverse effect, see Material adverse Merger Fund (MERFX), 95 change Mergers, 11f, 188–195 Maxheim, Christoph, 75 acquirer/target SEC filings, 210t May Day (1975), 177 activity, waves, 58f MBOs. See Management buyouts agreement, 119, 121, 193e, MCG Capital, 151–152, 151f 364e–366e, 419 McKeeson Corp. acquisition, 157 announcement/closing, problems, 22 Mei, Danqiing, 414, 418 antitrust problems, 112 Men’s Wearhouse, Jos. A. Banks arbitrageurs, impact, 146, 250 (battle), 282 arrangement, scheme, 196–197 Merger arbitrage, 3, 51, 96f Austria/Australia, public company mergers activist merger arbitrage, 412–416, 415f (timing), 162t, 163t analysis, limitation, 70, 72 average acquisition premia, 137t average annualized merger arbitrage bidding wars, 180–186 spread, 61e breakup fees, 117–1301, 122t, 123t, 125f average spreads, 62 buyer/target, relative size, 112 benefits, 88–98 Canada, 160t, 398–401 bond-like returns/volatility, historical cash mergers, 18–27, 144 pattern, 101–102 categories, 17 credit risk management, comparison, Chinese companies, 186–187 14–15 Chinesing, 108 k excess merger arbitrage returns, coerciveness, 272 k market returns (piecewise linear collapse, 104f, 132 regression), 71f collars, usage, 42–49 excess merger arbitrage returns, piecewise consideration, 232–240, 233e–236e, 246 linear regression, 74f deal structures, 188 funds, 77–88, 79f differences, 211 hedge funds, 65–66, 81f direct merger, 190f indices, 82, 83t, 84f, 86f, 87t, 95 due diligence, 116–117 indices, 463–468 Europe, impact, 401–402 investments, 178 failure rates, 106t liquidity, impact, 146 financing, 232 long/short components, 34–35 forward triangular merger, 191f low-volatility strategy, 172 France, public company mergers (timing), mechanics, 18 163t performance, 64–77, 99f, 101f, 463 fraud, 116–117 pre-quantitative easing performance, 101t Germany, public company mergers pure merger arbitrage strategy, 80 (timing), 163t put option characteristics, Lefèvre government involvement, 363 diagram, 16f hostile bids, 180–186 ranking, 90t–93t hostile mergers, ubiquity, 116 research approaches, 66, 68 international anti-competition merger returns, 71f, 72t, 146 regulation, 380–382 reverse merger arbitrage, 108 large-scale mergers, problems, 111 risk, 64, 82, 85f law jurisdictions, 189t spreads, 60–65, 63f, 65t, 143 legal aspects, 250 Standard & Poor’s Merger Arbitrage management opposition, 116 Indices, 466t, 467t, 468f market capitalization, 67 term, occurrence/frequency, 19f mixed cash/stock mergers, 38–42

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506 INDEX

Mergers (Continued) Ministry of Commerce (MOFCOM), mixed stock/cash mergers, 17 403–405 national governments, impact, Minority shareholders, 206, 347–355 394–402 Minority squeeze-outs, 341–347 number, 58f control, 355–357, 359 opposition, 113 family control, 355–360 optionality, 47t, 49e layered ownership structures, 358 premium, 131 multiple share classes, 358 principal/conflict, handling, 255 related party transactions, 358 process, 254–255 share class structures, 357–359 provincial governments (Canada), impact, special takeover defenses, 359 385–394 special voting rights, 358 public intervention, 111–112 Mixed cash/stock mergers, 17, 38–42 rationale, 219–220 calculation (difficulty), 40–41 reasons, 317e–322e Modigliani-Miller paradigm, 166 reverse triangular merger, 191f Mondelez, 340 SEC regulation, 210–211 Monopoly, conspiracies, 367 securities regulators, 384 Montebourg, Arnaud, 402 shareholders, 112–115, 409 Monte Carlo projections, 462–463 short-form merger, completion, 156 Monthly excess return (alpha), 70 state governments, impact, 385–394 MONY Group, AXA acquisition, 427 stock-for-stock mergers, 17, 27 Morningstar Credit Agricole Structured stocks, volatility, 51–56 Asset Management Center for structuring, 155 International Securities and Derivatives success, probability, 106–107 Markets (CASAM CISDM), 78 k target company, arbitrageur holdings, 154t Motorola Mobility, Google acquisition, k tax policy, 382–384 129–130 tender offers, 105, 158–159, 202–207 Moyes, Jerry, 325 ticking fee, 165 MPG Office Trust, Brookfield Office timing, 203t Properties acquisition, 149 trade unions, impact, 405–408 MSCI Barra hedge fund indices, 78 triangular mergers, types, 190 Muddy Waters (research firm), 186 typology, 17 Multiple arbitrage, 219, 337–338 uncertain merger consideration, 232–240 Multiple share classes, impact, 358 United Kingdom public company mergers, Murdoch, Rupert, 281 timing, 161t Mutual funds, 469–473 cash level, 457–458 United States mergers, 158t, 159t, merger arbitrage, usage (efficient frontier), 395–398 97f windfall profits, types, 311 publicly available mutual funds, merger worldwide volume, 58f arbitrage usage, 455 Mergers and acquisitions (M&As), 242 redemptions, 453 appearance, 56 risk/return trade-off, merger arbitrage court decisions, 270 (usage), 96f government involvement, 363 Mylan NV, 152–153, 152f legal universes, 251f Merisel, Inc., 333–335, 336f Metropolitan New York, 375t–379t N Mezzanine debt, 227–228 Naked short sales, prohibition, 448 Micro-cap stocks, trading volumes, 152 National Development and Reform Micron Technology, Tsinghua Unigroup Commission (NDRC), 403 acquisition, 398 National governments, impact, 394–402 Milken, Michael, 228 National Home Health Care Corp. Minimum acceptable return (MAR), 87 acquisition, 430

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Index 507

National interest, stress, 111 Payment in kind (PIK) debt, increase, 228 National regulations, impact, 252 Payoff diagram, usage, 49 NDRC. See National Development and Payoff distribution, 14f, 15 Reform Commission Payout profile, 175 Negative alpha, 442, 443f, 443t PDS Gaming, installment sale, 231 Nelson Resources, Lukoil acquisition, Peak, criteria, 98 352–353 Peltz, Nelson, 276 Net asset value (NAV) calculations, 82 Peoplesoft products, 277 Net returns, 139–140 Permitted bids, 280 Netsmart, 247, 317e–322e Perry Corp. King shares ownership, 446 Net spreads, 143 Pershing Square Capital Management LP, Neurolofy Products, 238 412, 434 Nevada gaming regulation/redemption, Petrasek, Lubomir, 155 Wynn Resorts description, 388e–394e Pickens, T. Boone, 276 Nexen, Inc. China National Offshore Oil Piecewise linear regression, estimation, 69 Co. (CNOOC) acquisition attempt, 400 PIK. See Payment in kind No Extension statements, 267–269 Pinnacle Gas Resources, 115, 134–136, 136f No Increase statement, 267–269, 268e Poison pills, 186, 278–280, 283, 427 Non-common law jurisdictions, regulations, Portfolios, 72t, 177–180, 461 268–269 Post-merger HHI, 374t Noncore businesses, sale, 227 Potash Corporation, BHP Billiton Noncore divisions, shedding, 339 acquisition attempt, 399–400 Non-U.S. companies, exemptions, 290–291 Preannouncement stock returns, 54 Non-U.S. merger, composition, 59 Preferred stock, 148–149 Premia, historical information, 136 k Price/earnings (P/E) ratio, 337–338 k O Price efficiency, definition, 449 Odyssey HealthCare, 114 Priceline.com, Kayak Software Corp. merger OFI Asset Management study, 65 agreement (forward triangular merger Ohio Mattress, bonk placement failure, 248 description), 193e Omnicare, Inc. v. NCS HealthCare, 275 Price movements, French regulation, 262e Omnicom, control provisions (change), Prince, Charles, 240–241 299e–303e Prisoner’s dilemma, 113 OneChicago, single stock futures offering, Private equity, 328–331, 336–340 437 Private equity buyouts, 312–315, 328, OneSource Information Services, shareholder 331–333 rights plan, 278–279 Private-equity sponsored management Options, 437–443 buyout, 76–77 prices, 176, 440t Private investments in public equity (PIPE), trading volume (Superior Essex Inc.), 177f 329–330 vesting, 311 Product, true value (discovery), 9 Order book, 151f, 152f Profit sharing agreements, 342–343, Order placement, technological 343e–344e improvements, 178 Progress Energy Resources Corp., Petronas Overpayment risk, 9 Bhd acquisition attempt, 400 Promissory notes, issuance, 225–226 Proration provision, 41 P Provincial governments, impact, 385–394 Pac-Man takeover defense, 281–282 Provincial laws, impact, 252 Parent Share, 44 Proxy campaigns, 209, 433–434 Passively managed risk arbitrage index, Proxy statements, 209, 216, 418–419, 425 creation, 69 Pseudo-probability, calculation, 464–465 Paulson & Co., 338 PTTEP, hostile bid, 126

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508 INDEX

Public company mergers, timing, 160t–163t Risk, 103, 143 Public equity, private investments, 329–330 arbitrage, 5 Public intervention, 111–112 downside risk measures, 88t, 467t Publicly traded companies, family control, management, 435, 460–463 355–360 risk/return profile, 342 Public opposition, 433–434 split, 236 Put option characteristics, Lefèvre diagram, statistics, CAPM framework, 83 16f systemic risk, 248 Put up or shut up regime, 262 Risk-free interest rate, indicator consideration, 64 Risk-return trade-off (risk/return trade-off), Q 89, 96f, 468f Quaker Event Arbitrage Fund (QEAAX), 95, Rohrabacker, Dana, 398 97 Royal Bank of Canada (RBC), 241–242 Qualified dividends, tax rate, 167 Rue21, Inc., 293, 294e–297e Quantitative easing (QE), 98–102, 101t Rule 13-e3 (Rule 13-E3) (SEC), Quest Resources Corp., 134e–135e, 136f 215–216, 293 Quiznos, going-private transaction, 427 Rule 14d-10 (SEC), 204–205 Rule 14E (SEC), 214–215 Rule 425 filing (SEC), 210 R Rumors, 11–12, 261e RBC. See Royal Bank of Canada Rural/Metro Corporation, Emergency Real estate investment trusts (REITs), 87, Medical Services acquisition, 241 164–165, 169, 229 ReFlow Management Co., shares k acquisition, 457 S k Regulation, SEC approach, 209–216 Sack, Burton, 417 Regulation SHO, 447, 448 Sale financing, 229 Regulation T, 173, 205 Sale-leaseback transactions, Reincorporation, impact, 281 structuring, 229 Related party transactions, 326e, 323–327, Salix Pharmaceuticals, Allergan 324e–325e, 358 acquisition, 412 Reporting periodicity, variation, 471 Sanofi/Genzyme CVR, 238t, 239f Restoration Hardware, acquisition, 430 Sarbanes-Oxley law, 225 Returns, 72t Savasoglu, Serkan, 72 annualized return, 26f, 163 Schedule 13D (SEC), purchases, 348–349 arbitrage, expected return, 139–140 Schedule 13E-3 (SEC), 298, 348 daily returns, 54f, 56f Schedule 14A (SEC), 210–211 excess merger arbitrage returns, 71f, 74f Schedule 14D-9 (SEC), 215 extension risk, impact, 163t Schedule K-1 (IRS), 469, 471 leverage, impact, 172–174 Schedule TO (SEC), 210, 290–291 monthly return statistics, 83t Scheme of Arrangement, see Arrangement portfolios, merger arbitrage returns, 72t SCPIE, The Doctors’ Company acquisition, projections, 25 114 short sales element, 169–172 Second requests, 369 sources, 143 Securities, 384, 388e–394e, 429, 445t Reverse merger arbitrage, 108 Securities and Exchange Act, Section 10b-5, Reverse triangular merger, 190, 191f, 427 193e–194e Securities and Exchange Commission (SEC) Revlon v. MacAndrews & Forbes, acquirer/target filings, 210t 272, 274, 345 filings, 209, 222 Rising market, constant percentage spread merger regulation, 210–211 (losses), 35t regulation approach, 209–216

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Index 509

rules, 214–216 Silver Lake Partners, acquisition tender offer regulation, 211–215 proposal, 311 Security Capital, MTN Capital acquisition, Simon Properties, 385–386 160 Simple interest, calculation, 24 Sellers, 146, 230–231 Single stock futures, OneChicago offering, Semi deviation, 85 437 Shannon, John, 75 SISU Capital Ltd., 426, 430 Shareholders, 255, 288–289, 349 Small-cap premium, manifestation, abuse, occurrence, 411 148 activism, 407–408 SOE. See State-owned enterprise activists, rise, 411–412 Soft dollars (brokerage commission), base, composition (change), 131 451–452 beneficial owner status, 425 Solomon v. Pathe Communications Corp., board disenfranchisement, justification, 272 275–276 Sortino ratio, 85 economic exposure, absence, 192 Southeastern Asset Management, merger investment exit, 144 stake, 113 opposition (mergers), 112 Southwest Airlines Co., 47e–48e, 49 price maximization, board (impact), Sovereign Bancorp, Groupo Santander 273–275 acquisition, 116 proxy campaigns, 433–434 Spain, takeover timetables, 264f–265f public opposition, 433–434 SPAR-Mutual algorithm, 458, 459e Special takeover defenses, 359 reincorporation, impact, 281 Special voting rights, 358 selling shareholders, payment, Speculation, arbitrage (differences), 9 222 Spreads, 18, 60e, 63f, 171t, 179 k shares, withholding, 434 k annualized spread, increase, 37 stock sales, impact, 409–411 average annualized merger arbitrage Shares, 357–359 spread, 61e borrowing, 446 bid/offer spreads, 452 withholding, 434 deal spread, 143–144 Sharpe ratio, 85 dispersion, downtrend, 62 Shell acquisition of Cove Energy plc, evolution (Autonomy Corp.), 145f breakup fee, 128e information, problem, 67 Sherman Act of 1890, 56 leveraged loans, 249f Shorin, Arthur T., 332 merger arbitrage spreads, 60–65 Short biased hedge funds, performance, 444t overview, 178t Shorted stock, dividends payment, 172 problems, avoidance, 68 Short-form merger, 156, 199 widening, 163 Short sales, 29–30 width/tightness, 143 activity, 450f Spruchverfahren, 343 closing, process, 29–30 Squeeze-outs, 341, 342t, 346–355 hedges, comparison, 169–172 Standard & Poor’s 500 (S&P500) Index, 72, naked short sales, prohibition, 448 183f selling pressure, 34 Standard & Poor’s (S&P) Depositary Short sellers, position coverage, 447 Receipts (SPDR), 95 Short selling, 443f, 444 Standard & Poor’s Merger Arbitrage Indices, bans, 448–449 466f, 467t, 468f Short-term capital gains (generation), merger Stapled financing, 231 arbitrage (usage), 180 State Administration of Foreign Exchange Siemens, acquisition (rumor), 13f (SAFE), 403 Silconix, Vishay Intertechnology acquisition, State Administration of Industry and 347–348 Commerce (SAIC), 403

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510 INDEX

State Administration of Taxation (SAT), 403 Supra-national regulations, State governments, impact, 385–394 251–252 State laws, impact, 252 Survivorship bias, 80 State-owned Assets Supervision and Swiss Performance Index (SPI), 75 Administration Commission (SASAC), Switzerland, takeover timetables, 403 264f–265f State-owned enterprise (SOE), Swoboda, Otto, 4–5 400–401 Symmetric performance fee, risks, 470–471 Stefanesco, Irina, 72 Systemic risk, 248 Stifel Financial Corp. acquisition, 43e Stock-for-stock mergers , 17, 27, 33–34, 59, 133, 217 T analysis, perils, 66–73 Takeover Code, 161, 257–289, 273 arbitrage, comparison, 172 Takeovers, 259f, 260f, 264f–265f best price rule, 286–287 cash mergers, contrast, 144 board, 270–271 cash receipt, 454 buybacks (leveraged recapitalizations), market movement protection, 462 282 short leg, 438 buyer lockout, 266 Stock-for-stock offer, 452 creeping takeovers, 284–286 Stock-for-stock swap, 231–232 cross-border transactions, 290–291 Stock-for-stock transactions, 70, cumulative voting, 281 461–462 defenses, 276, 278, 281–283 Stocks entire fairness, requirement, 271–272 appreciation rights, 299 exit rights, 291–292 arbitrageur shorting, 36–37 freeze-out, 282–382 k bonds (combination), efficient frontiers, hostile takeover transactions, ranking, k 94f 182t cash merger, idealized chart, 21f Imaging Ltd./Coviden merger agreement, combination, 54 voting conditions, 289e–290e investors, payoff distribution, 14f mandatory acquisitions, 284–286 market, development, 132–133 mandatory takeover rules, characteristics, mergers, percentage, 59f 285t–286t multiple classes, 281 market manipulation, 287–292 options, 299, 438 mergers, coerciveness, 272 ownership, percentage, 106 No Increase/No Extension statements, preannouncement stock returns, 54 267–269 preferred stock, series, 149 Pac-Man takeover defense, 281–282 price, examples, 181f poison pills, 278–280 shorting, 444–450 shareholders, 273–276, 288–289 short seller, 172 speculation, presence, 132 trading volume (description), liquidity staggered boards, impact, 280–281 (usage), 148 stocks, multiple classes, 281 volatility, 51–56 U.S. court decisions, 269–276 Stonington Partners, 334–335 Takeunder, 22 Strategic alternatives, 13, 413 Target, 18 Strine, Leo, 323 balance sheet, cash (availability), 227 Summary term sheet, 214 breakup fees, 117–118, 118f, 119f Sungard Data Systems, acquisition, 311–313 cumulative abnormal stock returns, 208t Sunoco Inc., Energy Partners, LP acquisition, loss severity, 133 39–40, 40e Target company, 154t, 214, 219 Superior Essex Inc., option trading volume, Tashman, Adam, 463 177f Taubman Centers, Inc., ownership battle, Supervoting shares, usage, 355 385–386

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Index 511

Tax breakup fees, 120f, 124f deferral, application, 383 costs, 450–453 inversion, 383 going-private transactions, 215–216 policies, 382–384 hedging, accuracy, 45 post-inversion, 383 timing, arbitrageur analysis, 162 reporting (mutual funds), 471 Transkaryotic decision, 418, 425 Tax Increase Prevention and Reconciliation Treasury bills (T-bills), 24 Act of 2005, 167 Treasury yield, short-term trough/peak, 98 Tender offers, 105, 156, 198–205 Treynor ratio, 85 acquirer/target SEC filings, 210t Triangular mergers, types, 190 advantage, 198 Tropicana Casino license, withdrawal, 387 amendment, 215 Trough, criteria, 98 arrangement, scheme, 196–197 Trustreet Properties, General Electric bidder, share ownership, 214 acquisition, 149, 151 completion, 155–156 Trustreet series C preferred stock, volume deal structures, 188 chart, 150f extension, 214–215 220 requests, 431–432 financing, 232 funds, sources, 214 U judicial review, impact, 272 UCITS-compliant funds, 78 law jurisdictions, 189t UCITS funds, 470–471, 473 mergers, 158–159, 202–207 Uncertain merger consideration, Rule 14E requirements, 214–215 232–240 SEC regulation, 211–215 Unisource Energy, Kohlberg Kravis Roberts shares, withholding, 434 & Co. acquisition, 103, 387 speed, increase, 202 Unisource stock price, postmerger collapse, k statements, 209, 214, 216 k 104f summary term sheet, 214 United Kingdom (UK) timing, 203t breakup fees, 127f 3G Capital, Burger King merger, 200e–201e City Code on Takeovers and Mergers, 257 3PAR, 184, 185f public company mergers, timing, 161t Ticking fee, 165 Takeover Code, 57, 250, 257–269 Tight spreads, 143 United States Time-weighted portfolio, structuring, 75–76 antitrust rules, 367–369, 380 Tokyo Electron (ETL)/Applied Materials, incorporation laws, 385–387 merger agreement, 363, 364e–366e United States mergers, 158t, 159t, 395–398 Topps, lawsuit, 332–333, 428 United Steelworkers (USW), Esmark Top-up option, 156, 200e–201e contract, 406 Total return swaps, sellers, 441 University of Massachusetts Amherst, MAR Touchstone Merger Arbitrage Fund data, 78 (TMGAX), 95 Unocal v. Mesa Petroleum, 270–271 Tower Australia, Dai-Ichi Life Insurance Unreasonably small capital, presence, 245 Company (arrangement scheme), UOP, Inc., majority shareholder, 271 196e–197e Upmarkets, consideration, 70 Tracking error, 83 Upper Deck, 332, 428 Trade unions, impact, 405–408 Upside/downside capture ratio, 87 Trading, 178, 179 U.S. minority shareholders, impact, 344–346 insider trading, 22–23 Utilities, takeover (failure), 386 investing, contrast, 435–436 Trane, Ingersoll-Rand acquisition (account), 34e V Transactions, 214 Valeant Pharmaceuticals, 186, 412 Atmi, Inc. transaction bonus agreement Valuation opinion, 243 (disclosure), 304e–305e Value-at-Risk (VAR), usage, 54

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512 INDEX

Value trap, 410 Weighted average cost of capital (WACC), Van Gorkom, 246, 270 421 Vector Capital, 312 Wells Fargo/Wachovia merger, effect, 379t Verenium Corporation, 217, 218f Westfield America Trust, 385–386 VistaCare, acquisition, 114 Wide spreads, 143 Vodafone, Supreme Court ruling, 384 Wild Oats, Whole Foods acquisition (FTC Volatility, 50–56 injunction), 380 implied volatility, 177f William Blair, fairness opinion, 247 low-volatility strategy, 469 Wilshire Enterprises, 212e–213e, 346 Volkswagen AG, Porsche SE takeover, 282, Windfall profits, types, 311 447 Windrose Medical Properties, 44–45, 44e Volume-weighted average price (VWAP), 31, World Focus, debt, 331 39, 284 Wynn Resorts, 387, 388e–394e Vulcan Materials Company, Energy Transfer Partners, LP, acquisition, 39 Y Yang, Taewon, 73, 106 W Yeoh, Soon Chin, 75 Walkling, Ralph, 155 Wallace, Carter, 417 Wang, Jia, 73 Z Wasserstein, Bruce, 242 Zilbermints, Boris, 353

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