Risk Arbitrage

Chapter 5

Other Risk ArbitrageSituations

Exchange Offers

Offers to exchange the securities of Company Y for the majority of Company X’s—either via a type “B” reorganization or simply a bid for a controlling interest—were a highly popular form of takeover vis-a-vis the merger route in the 1960s as the willing supply of sellers failed to keep pace either with the ever-increasing list of buyers or with their individual appetites for external expansion. To the arbitrageur, this form of take-over was particularly attractive because it is normally of much shorter duration than a merger. Normally, only the SEC’s approval is required and it must grant clearance of the prospectus describing the exchange offer. No definitive agreement is required, nor is there need for a formal IRS tax ruling prior to making the offer effective. When shareholder approval (to authorize the new shares for the offer) is required on the part of the Groom, the proxy for the meeting is filed with the SEC together with the offering prospectus, and both are usually cleared simultaneously. The exchange offer is considered effective once the SEC has cleared the prospectus or once the required percentage of shares, if specified, is obtained, so that the only remaining technicality is shareholder approval of the new shares. The offer can be completed long before the shareholders actually vote; however, the vote usually either coincides with the offering period or follows it by one to two weeks at most.

Not only ...