P1: a/b P2: c/d QC: e/f T1: g
FM JWBT114-Kirchner June 4, 2009 17:38 Printer: Yet to come
Contents
AL
Preface ix
Acknowledgments xii
RI
TE
PART ONE
The Arbitrage Process
MA 1
CHAPTER 1
ED
Introduction to Merger Arbitrage 3
Cash Mergers 12
Stock-for-Stock Mergers 19
HT
CHAPTER 2
IG
Incorporating Risk into the Arbitrage Decision 43
Probability of Closing 45
R
Severity of Losses 60
Expected Return of the Arbitrage 68
PY
CHAPTER 3
CO
Sources of Risk and Return 71
Deal Spread 71
Two Aspects of Liquidity 73
Timing and Speed of Closing 80
Dividends 87
Short Sales as a Hedge and an Element of Return 90
Leverage Boosts Returns 93
Covered Call Writing 95
Commissions and Portfolio Turnover 98
Bidding Wars and Hostile Bids 100
v

P1: a/b P2: c/d QC: e/f T1: g
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vi CONTENTS
CHAPTER 4
Deal Structures: Mergers and Tender Offers 103
Mergers 103
Tender Offers 108
Comparison of Mergers and Tender Offers 109
PART TWO
Pitfalls of Merger Arbitrage 117
CHAPTER 5
Financing 119
Types of Debt Funding 122
Financing of Mergers versus Tender Offers 130
Uncertain Merger Consideration 131
Conflicted Role of Investment Banks 135
Fairness Opinions 140
Systemic Risk 142
CHAPTER 6
Legal Aspects 145
Merger Process 148
Takeover Defenses 156
CHAPTER 7
Management Incentives 163
Management Compensation 165
Continuing Management Interest in Private Equity
Buyouts 171
Long-Term Planning in Management Buyouts 173
Milking a Company through Related Party Transactions 182
CHAPTER 8
Buyouts by Private Equity 187
Private Equity’s Advantage 188
CEOs Don’t Want to Sell to the Highest Bidder 191
Private Equity Funds Have Their Own Agenda 193
Buyouts as Financial Engineering 196

P1: a/b P2: c/d QC: e/f T1: g
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Contents vii
CHAPTER 9
Minority Squeeze-outs 199
Boards Lack Effectiveness During Squeeze-outs 200
Minority Shareholders Are in a Tough Spot 202
Family Control 210
CHAPTER 10
Government Involvement 213
Antitrust Enforcement 213
SEC’s Approach to Regulation 223
State Governments 231
Federal Government 236
Trade Unions 240
CHAPTER 11
Four Ways to Fight Abuse of Shareholders in Mergers 243
“Just Sell” Is for Losers 243
Case for Activist Merger Arbitrage 246
Legal Tactics 248
Public Opposition 262
PART THREE
Investing in Merger Arbitrage 265
CHAPTER 12
The Role of Merger Arbitrage in a Diversified Portfolio 267
Volatility of Stocks Going through a Merger 268
Return and Correlation Characteristics of Merger Arbitrage 272
Merger Arbitrage outside the United States 278
Risk and Return of Merger Arbitrage Funds 282
Benefits of Merger Arbitrage in a Diversified Portfolio 292
CHAPTER 13
Investing in Arbitrage 301
Trading versus Investing 301
Leverage and Options 302
Shorting Stocks 309
Transaction Costs 315
Managing the Cash Position 318
Risk Management 325

P1: a/b P2: c/d QC: e/f T1: g
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viii CONTENTS
Standard & Poor’s Merger Arbitrage Index 329
Separate Accounts 331
Hedge Funds and Mutual Funds 333
Notes 339
About the Author 346
Index 347