Risk Arbitrage

Chapter 4

Cash Tender Offers

Situations Prior to 1971

Arbitrage activity in the realm of cash tender bids was strictly the private preserve of the Arbitrage Community prior to the adoption of the SEC’s “Short Tendering Rule” in May 1968.¹ This Rule severely curtailed the Community’s participation in what had been the most profitable and undoubtedly the most exciting of all arbitrage situations. It is important to comprehend how the arbitrageurs functioned in this activity before the Rule was adopted, and after its adoption, because the difference manifests itself not only in arbitrageurs’ profit and loss statements, but more importantly, in the marketplace as well.

What the Rule did, among other things, was to prohibit “short tendering,” a practice that involved tendering, or offering securities which an arbitrageur had not actually purchased. In short tendering, the arbitrageur would not be “long”—in the legal sense of the word—some or all of the securities that he was tendering in acceptance of a particular cash tender offer. “Short tendering” assumed strategic importance in any offer for cash which was for less than all of a company’s outstanding common stock. The ability to tender short was the hedge that the arbitrageur needed in order to safeguard his profit and reduce his price risk, very much in the same way as he was accomplished through a short sale in a merger arbitrage. Tendering short could be accomplished in two different ways. First, if physical securities were ...