Risk Arbitrage, 2nd Edition

CHAPTER 8Hostile Takeovers

Hostile (or contested) takeovers are among the most exciting arbitrage transactions. They are also the most challenging and, potentially, the most profitable, but an arbitrageur who makes a wrong call in a contested takeover can lose a great deal of money. Contested takeovers have brought great publicity and media attention to the risk arbitrage business. Specialty publications usually pick up on any contested takeover and write numerous stories regarding the transactions involved. In this chapter, I often refer to them as contested, in order to differentiate them from uncontested takeovers, although the term hostile is more often used.

Contested takeovers also have a critical time factor from the arbitrageur's point of view. When mergers are announced, the arbitrageur does not need to drop everything and analyze the brand‐new merger transaction. Mergers generally tend to take three to five months to complete, and it is not necessary for the arbitrageur to complete an analysis on the very first day. Contested takeovers, however, are a different situation. Developments tend to occur more quickly than in mergers. It is imperative that the arbitrageur drop everything else when a new contested takeover is announced. He or she must try to analyze everything possible about this transaction.

While developments may occur quickly in contested takeovers, it does not mean that contested takeovers are completed quickly. In fact, since courts, both state and ...