Risk Arbitrage

Chapter 7

Active Arbitrage

The genesis of “active arbitrage” must be seen in the context of the early 1970s and the abuses of entrenched managements, which were highlighted in Chapter 6. “Active arbitrage” investments can be considered ones in which an investor takes steps to organize shareholders and acts as a catalyst to bring about change. These strategies are relevant in situations where the portfolio manager believes that there is significant value or performance shortfall arising from current corporate policies that is not being adequately addressed by the marketplace. In these situations there would be an opportunity for an investor to employ tactics that go beyond the traditional arbitrage approach in order to catalyze changes that will lead to substantial value gains.

The collapse of takeover activity in the early 1970s and the market for corporate control left a dearth of active catalysts in the investment community. As a consequence, there were numerous examples of situations in which corporate policy choices decreased value but aroused no active response from the market. This created a “value gap” that could be addressed and corrected by “active arbitrage” strategies.

The expertise necessary to engage successfully in “active arbitrage” situations was considered strongly related to the traditional skills necessary for successful risk arbitrage. Traditionally, the arbitrage firm has used its capacity for risk bearing and its expertise in corporate ...