Risk Arbitrage

Chapter 8

Summary andConclusions

Arbitrageurs participate in a great variety of situations that arise from the various forms of corporate financial reorganizations and refinancing. The author has been chiefly concerned with those situations that involve some degree of risk. The risk factor manifests itself in the spread and thus provides the arbitrageur with the requisite maneuverability and potential profit which permits him to assume that risk.

To understand and predict the behavior of securities involved in the various types of situations requires deeper analysis than is generally manifested by the investing public. Statements by the financial press and by company officials as to the value of a particular offer should be regarded skeptically.

The same holds for statements by research departments of brokerage firms attempting to explain either the market action of a proposed Bride, or her technical chart pattern. She is selling at a price not for any reason of over- or under-supply, but due solely to the collective activity of professional arbitrageurs who are together setting the price based on:

• Their calculation of the parity

• Their assessment of the risks

• Their estimation of the probable timetable

• Their availability and cost of capital

• Alternative rates of return available to them

 

The activity of arbitrageurs moving in and out of these situations produces certain other phenomena in the marketplace; e.g., post-merger selling pressure, exchange offer pressures, tax reversals, ...