By Thomas Kirchner
An in depth examine an enormous hedge fund strategy
Written by way of a fund supervisor who invests exclusively in merger arbitrage, also called hazard arbitrage, and different event-driven thoughts, Merger Arbitrage is the definitive publication on how this substitute hedge fund procedure works. preliminary chapters are devoted to the fine details of the strategy--cash mergers as opposed to inventory for inventory mergers, felony facets of mergers, and pitfalls of the merger process--while later chapters specialise in giving the reader sound recommendation for integrating merger arbitrage into an funding portfolio. Merger Arbitrage is helping readers comprehend leverage and innovations, shorting shares, and criminal points of merger arbitrage, together with looking appraisal or submitting court cases for insufficient merger attention. For these trying to achieve an part within the merger arbitrage area, this ebook has every little thing they should succeed.
Thomas F. Kirchner, CFA (New York, NY), is the founder and portfolio supervisor of Pennsylvania road money (www.pennavefunds.com), which invests in merger arbitrage and different event-driven options.
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Additional info for Merger Arbitrage: How to Profit from Event-Driven Arbitrage (Wiley Finance)
Example text
The longterm prospects of Ingersoll-Rand clearly were not bad and would not have justified an 11 percent drop. It can be explained only by arbitrage activity. Experienced investment bankers warn company management during merger negotiations of the risk to their stock price and suggest structures with a cash component to a stock-for-stock merger in order to reduce short selling. J. (AP)—In a deal worth a cool $10 billion, IngersollRand Co. will acquire Trane Inc. and create one of the world’s largest makers of commercial and residential home air conditioners, refrigerators for trucks and stores, and other climate control products.
10 Evolution of the Agere/LSI Spread 2007-03-30 P1: a/b c01 P2: c/d QC: e/f JWBT114-Kirchner T1: g May 30, 2009 9:8 Printer: Yet to come Introduction to Merger Arbitrage 25 It is clear that short sales from arbitrage activity can lead to significant selling pressure on the stock of a buyer after the announcement of a stock-for-stock merger. Often analysts and journalists attribute the drop of a buyer’s stock after a merger announcement to fundamental reasons, such as the prospect for the merged entity.
The arbitrageur will execute two transactions: 1. 30 per share to buy 100 shares of Agere. 2. 12 per share. It helps to examine the cash flows and stock holdings after these two trades. 2. 00. 00. 00 Agere LSI Net be converted into 216 shares of LSI. The arbitrageur is then long 216 shares and short 216. The long position can then be used to deliver shares to the counterparty from which the short position was borrowed. 00. The example of 100 shares is useful for illustrative purposes. Rather than looking at the purchase of 100 shares, transactions should be calculated on a per-share basis.