Risk Arbitrage, 2nd Edition

CHAPTER 1Introduction

Most U.S. corporations are domiciled in the state of Delaware, so I travel there often from my home in New York to cover court cases that can greatly affect the price of securities involved in a merger. The job of the arbitrageur covering a court case is to attempt to analyze the case and estimate which side will prevail before any decision is rendered by the court and also to estimate how the security prices will move given the outcome of the case. Once these factors are determined, the goal is then to set up positions in the securities that should prove profitable should the expected outcome occur and prices react as expected. Many times, it is a difficult job to determine the needed estimates and perform the required analysis.

A few years ago, I traveled to Delaware, because a few months earlier, the Cooper Tire & Rubber Company had agreed to be acquired by Apollo Tyres Ltd. Each Cooper Tire shareholder was to receive $35 cash per share at the closing of the $2.5 billion merger. The merger closing was subject to Cooper Tire shareholder approval as well as various U.S. and foreign government approvals. The $35 price tag represented about a 43% premium over Cooper Tire's existing stock price. After the merger was announced, Cooper Tire's stock price traded up $9.26 per share, closing at $33.82 on the first day after the merger announcement. The $1.18 spread between the $35 merger price and the Cooper Tire stock price did not indicate any of the troubles ...