Merger Arbitrage: How to Profit from Event-Driven Arbitrage by Thomas Kirchner

Merger Arbitrage: How to Profit from Event-Driven Arbitrage by Thomas Kirchner
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Merger Arbitrage: How to Profit from Event-Driven Arbitrage

by Thomas Kirchner


355 pages August 2009


A detailed look at an important hedge fund strategy Written by a fund manager who invests solely in merger arbitrage, also referred to as risk arbitrage, and other event-driven strategies, Merger Arbitrage is the definitive book on how this alternative hedge fund strategy works. Initial chapters are dedicated to the ins and outs of the strategy¨Ccash mergers versus stock for stock mergers, legal aspects of mergers, and pitfalls of the merger process¨Cwhile later chapters focus on giving the reader sound advice for integrating merger arbitrage into an investment portfolio. Merger Arbitrage helps readers understand leverage and options, shorting stocks, and legal aspects of merger arbitrage, including seeking appraisal or filing lawsuits for inadequate merger consideration. For those looking to gain an edge in the merger arbitrage arena, this book has everything they need to succeed.

Thomas F. Kirchner, CFA (New York, NY), is the founder and portfolio manager of Pennsylvania Avenue Funds (, which invests in merger arbitrage and other event-driven strategies.


Preface. Acknowledgments.

PART ONE The Arbitrage Process.

CHAPTER 1 Introduction to Merger Arbitrage.

Cash Mergers.

Stock-for-Stock Mergers.

CHAPTER 2 Incorporating Risk into the Arbitrage Decision.

Probability of Closing.

Severity of Losses.

Expected Return of the Arbitrage.

CHAPTER 3 Sources of Risk and Return.

Deal Spread.

Two Aspects of Liquidity.

Timing and Speed of Closing


Short Sales as a Hedge and an Element of Return.

Leverage Boosts Returns

Covered Call Writing.

Commissions and Portfolio Turnover.

Bidding Wars and Hostile Bids.

CHAPTER 4 Deal Structures: Mergers and Tender Offers.


Tender Offers.

Comparison of Mergers and Tender Offers.

PART TWO Pitfalls of Merger Arbitrage.

CHAPTER 5 Financing.

Types of Debt Funding.

Financing of Mergers versus Tender Offers.

Uncertain Merger Consideration.

Conflicted Role of Investment Banks.

Fairness Opinions.

Systemic Risk.

CHAPTER 6 Legal Aspects.

Merger Process.

Takeover Defenses.

CHAPTER 7 Management Incentives.

Management Compensation.

Continuing Management Interest in Private Equity Buyouts.

Long-Term Planning in Management Buyouts.

Milking a Company through Related Party Transactions.

CHAPTER 8 Buyouts by Private Equity.

Private Equity's Advantage.

CEOs Don't Want to Sell to the Highest Bidder.

Private Equity Funds Have Their Own Agenda.

Buyouts as Financial Engineering.

CHAPTER 9 Minority Squeeze-outs.

Boards Lack Effectiveness During Squeeze-outs.

Minority Shareholders Are in a Tough Spot.

Family Control.

CHAPTER 10 Government Involvement.

Antitrust Enforcement.

The SEC's Approach to Regulation.

State Government.

Federal Government.

Trade Unions.

CHAPTER 11 Four Ways to Fight Abuse of Shareholders in Mergers.

ˇ°Just Sellˇ± Is for Losers.

Case for Activist Merger Arbitrage.

Legal Tactics.

Public Opposition.

PART THREE Investing in Merger Arbitrage.

CHAPTER 12 The Role of Merger Arbitrage in a Diversified Portfolio.

Volatility of Stocks Going through a Merger.

Return and Correlation Characteristics of Merger Arbitrage.

Merger Arbitrage Outside the United States.

Risk and Return of Merger Arbitrage Funds.

Benefits of Merger Arbitrage in a Diverisified Portfolio.

CHAPTER 13 Investing in Arbitrage.

Trading versus Investing.

Leverage and Options.

Shorting Stocks.

Transaction Costs.

Managing the Cash Position.

Risk Management.

Standard & Poors Merger Arbitrage Index.

Separate Accounts.

Hedge Funds and Mutual Funds.


About the Author.