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Merger Arbitrage, 2nd Edition

Book Description

Mitigate risk and increase returns with an alternative hedge fund strategy

Merger Arbitrage: How to Profit from Event-Driven Arbitrage, Second Edition is the definitive guide to the ins and outs of the burgeoning merger arbitrage hedge fund strategy, with real-world examples that illustrate how mergers work and how to take advantage of them. Author Thomas Kirchner, founder of the Pennsylvania Avenue Event-Driven Fund, discusses the factors that drove him to invest solely in merger arbitrage and other event-driven strategies, and details the methods used to incorporate merger arbitrage into traditional investment strategies.

And while there is always a risk that a deal will fall through, the book explains how minimal such risks really are when the potential upside is factored in. Early chapters of the book focus on the basics of the merger arbitrage strategy, including an examination of mergers and the incorporation of risk into the arbitrage decision. Following chapters detail deal structures, financing, and legal aspects to provide the type of in-depth knowledge required to execute an effective investment strategy. The updated second edition stresses new, increasingly relevant information like:

  • Worldwide legal deal regimes
  • UK takeover code
  • UK takeover code global offspring
  • Regulators around the world

The book provides clear, concise guidance on critical considerations including leverage and options, shorting stocks, and legal recourse for inadequate merger consideration, allowing readers to feel confident about trying a new investment strategy. With simple benefits including diversification of risk and return streams, this alternative hedge fund strategy has a place in even the most traditional plan. Merger Arbitrage: How to Profit from Event-Driven Arbitrage, Second Edition provides the information that gives investors an edge in the merger arbitrage arena.

Table of Contents

  1. Series Page
  2. Title Page
  3. Copyright
  4. Preface
  5. Acknowledgments
  6. Part One: The Arbitrage Process
    1. Chapter 1: Introduction to Merger Arbitrage
      1. Notes
    2. Chapter 2: The Mechanics of Merger Arbitrage
      1. Cash Mergers
      2. Stock-for-Stock Mergers
      3. Note
    3. Chapter 3: The Role of Merger Arbitrage in a Diversified Portfolio
      1. Volatility of Stocks Going through a Merger
      2. Merger Arbitrage Universe
      3. Merger Arbitrage Spreads
      4. Performance Characteristics of Merger Arbitrage
      5. Performance of Merger Arbitrage outside the United States
      6. Risk and Return of Merger Arbitrage Funds
      7. Benefits of Merger Arbitrage in a Diversified Portfolio
      8. Benefits of Merger Arbitrage in a Rising Interest Rate Environment
      9. Quantitative Easing
      10. Notes
    4. Chapter 4: Incorporating Risk into the Arbitrage Decision
      1. Probability of Closing
      2. Severity of Losses
      3. Expected Return of the Arbitrage
      4. Notes
  7. Part Two: Pitfalls of Merger Arbitrage
    1. Chapter 5: Sources of Risk and Return
      1. Deal Spread
      2. Two Aspects of Liquidity
      3. Beneficial Participation of Arbitrageurs
      4. Timing and Speed of Closing
      5. Dividends
      6. Short Sales as a Hedge and an Element of Return
      7. Leverage Boosts Returns
      8. Covered Call Writing
      9. Commissions and Portfolio Turnover
      10. Bidding Wars and Hostile Bids
      11. Chinese Companies
      12. Notes
    2. Chapter 6: Deal Structures: Mergers and Tender Offers
      1. Mergers
      2. Scheme of Arrangement
      3. Tender Offers
      4. Comparison of Mergers and Tender Offers
      5. Burger King Provision: The Best of Both Worlds
      6. SEC's Approach to Regulation
      7. Notes
    3. Chapter 7: Financing
      1. Types of Debt Funding
      2. Financing of Mergers versus Tender Offers
      3. Uncertain Merger Consideration
      4. Conflicted Role of Investment Banks
      5. Fairness Opinions
      6. Systemic Risk
      7. Notes
    4. Chapter 8: Legal Aspects
      1. Merger Process
      2. Corporation Codes
      3. Takeover Code and Its Derivatives
      4. Key U.S. Court Decisions
      5. Takeover Defenses
      6. Creeping Takeovers and Mandatory Acquisitions
      7. Best Price Rule
      8. Market Manipulation
      9. Notes
    5. Chapter 9: Management Incentives
      1. Management Compensation
      2. Continuing Management Interest in Private Equity Buyouts
      3. Long-Term Planning in Management Buyouts
      4. Milking a Company through Related Party Transactions
      5. Notes
    6. Chapter 10: Buyouts by Private Equity
      1. Private Equity's Advantage
      2. CEOs Don't Want to Sell to the Highest Bidder
      3. Private Equity Funds Have Their Own Agenda
      4. Buyouts as Financial Engineering
      5. Activists Replace Private Equity
      6. Notes
    7. Chapter 11: Minority Squeeze-Outs
      1. Boards' Lack Effectiveness during Squeeze-outs
      2. Minority Shareholders Are in a Tough Spot
      3. Family Control
      4. Notes
  8. Part Three: Investing in Merger Arbitrage
    1. Chapter 12: Government Involvement
      1. Antitrust Enforcement
      2. Tax Policy
      3. Securities Regulators
      4. State and Provincial Governments
      5. National Governments
      6. China: The Great Wall of Laws
      7. Trade Unions
      8. Notes
    2. Chapter 13: Four Ways to Fight Abuse of Shareholders in Mergers
      1. “Just Sell” Is for Losers
      2. The Rise of Shareholder Activists
      3. Case for Activist Merger Arbitrage
      4. Legal Tactics
      5. Public Opposition
      6. Notes
    3. Chapter 14: Investing in Arbitrage
      1. Trading versus Investing
      2. Leverage and Options
      3. Shorting Stocks
      4. Transaction Costs
      5. Managing the Cash Position
      6. Risk Management
      7. Merger Arbitrage Indices
      8. Separate Accounts
      9. Hedge Funds and Liquid Alternatives
      10. Notes
  9. About the Author
  10. Exercises
    1. CHAPTER 1
    2. CHAPTER 2
    3. CHAPTER 3
    4. CHAPTER 4
    5. CHAPTER 5
    6. CHAPTER 6
    7. CHAPTER 7
    8. CHAPTER 8
    9. CHAPTER 10
  11. Index
  12. End User License Agreement