CHAPTER 11The Exciting World of Risk Arbitrage

Over the course of the previous 10 chapters we have examined in depth the various elements of risk arbitrage, as well as methods for trading and monitoring the risk arbitrage portfolio.

The three elements of risk arbitrage—return, risk, and probability—have been demonstrated. The estimates are highly subjective, and they are based on the arbitrageur's ability to forecast many variables. In our opinion, the arbitrageur's analysis of these variables and of the transactions cannot be summarized via a computer model or a mathematical algorithm.

To pull together these three elements, let's examine a recent deal that incorporated many of the various elements.

The takeover battle for Straight Path Communications (STRP) included several offers for the company by both AT&T (T) and Verizon (VZ). Although VZ ultimately prevailed, securing a definitive merger agreement with STRP, there were several developments that the arbitrageur had to consider when deciding whether to own STRP.

The trigger to the takeover battle was not obvious to either STRP shareholders or arbitrageurs. On January 11, 2017, STRP entered into a settlement and consent decree with the Federal Communications Commission (FCC). The FCC had been at odds with STRP for many months. The FCC had delivered a letter of inquiry in September 2016 asking for detailed information on various spectrum licenses held by STRP.

The FCC settlement required STRP to pay a civil penalty of $15 ...

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