Archive for the 'Arbitrage' Category

Activist Investors and Close-End Fund Arbitrage

Posted on March 14, 2009, 11:07 am. 2 Comments

Argh! They beat me to the punch!

In Activist Arbitrage: A Study of Open-Ending Attempts of Closed-End Funds, which was co-written with Michael Bradley, Alon Brav, and Wei Jiang, and which was recently accepted for publication in the Journal of Financial Economics, we conduct a comprehensive empirical study of the attempts of activist arbitrageurs to open-end closed-end funds in the U.S. Unlike the traditional pure-trading arbitrage, activist arbitrageurs do not simply wait for convergence, but rather take actions to open-end the target fund, knowing that upon open-ending the price of the fund’s shares will be forced to converge to the NAV.

For the past three months I’ve been working on a paper with a similar topic: activist investors and closed-end fund arbitrage. I haven’t yet read the aforementioned paper, but I’m sure its a lot more in-depth and technical than my paper. The goal I had with my paper was to create a sort of Idiot’s Guide to Closed-End Fund Arbitrage and Activist Investors. I explain the methods, goals, and arguments of both the activists and fund management, give a walkthrough of some actual proxy contests, and discuss some of the shareholder issues that arise.

I should have my paper finished within the next month or so and I might post it online.

Dow and Rohm and Haas Settle Dispute

Posted on March 9, 2009, 9:09 pm. Closed

Finally. It has been a roller-coaster ride for all the shareholders, me include, but Dow and Rohm and Haas have settled their dispute over Dow’s acquisition of Rohm. Just look at the chart to see how much fun I’ve had these past few months.

I purchased ROH several months ago at $63 and have endured some thrilling declines, but I held on with the conviction that things would be settled favorably in or out of court. I figured there were three possible outcomes: (1) the worst possible scenario would be that the deal would fall through; (2) the most likely scenario would be a modification of the deal in which DOW would pay a slightly lower price for ROH; and (3) the best possible scenario would be DOW paying the original price for ROH.

Well, DOW and ROH settled their dispute out of court. And the best part? DOW is purchasing ROH for the full price of $78 per share.

Arbitrage Out the Arse

Posted on January 29, 2009, 12:16 am. Closed

I’ve got three interesting arbitrage opportunities for you.

First are SPAC liquidations (via Dealsleuth).

Second is the recent Pfizer/Wyeth merger (via Dividend Growth Investor).

Third is one that I have been looking at for weeks, which is the acquisition of Image Entertainment (DISK) for $2.75 per share. Today there was a large sell-off without any news whatsoever. I purchased some shares. I can only assume that it was a hedgie selling off for other purposes.

Arbitrage Opportunity: Fiduciary/Claymore Dynamic Equity Fund (HCE)

Posted on January 23, 2009, 12:34 am. Closed

Back in December, the closed end fund Fiduciary/Claymore Dynamic Equity Fund (HCE) announced that its Board adopted a proposal to liquidate the fund. The stock price jumped from 3.25 to 4.25-4.50. On the day of the announcement, the fund was trading at a discount of 27% to its net asset value. After the announcement, the discount narrowed to roughly 6%.

I believe this is a pretty good risk arbitrage opportunity. I think most of the shareholders will vote to liquidate. And after reviewing the actions of investors like Goldstein and Lipson, who have battled against closed end fund management that have refused to step down or otherwise make improvements for shareholders despite the fact of huge discounts to NAV or the fund is simply not meeting its benchmarks or objectives, when management actually advocates an action such as liquidation, I would take them seriously.

However, one would usually try to hedge the purchase of HCE in order to lock in the current 6% discount to NAV. The fund’s top holding is 5.8% in S&P depository receipts, followed by smaller positions in individual stocks such as AT&T, JP Morgan, IBM, and Honeywell. I’m not quite sure how one could acquire a good hedge. A dirty hedge might be to purchase SH, an etf from Proshares that tracks the inverse of the S&P 500.

Dow and Rohm and Haas Deal

Posted on December 30, 2008, 8:03 pm. Closed

Dow Chemical (DOW) made an offer to acquire Rohm and Haas (ROH) back in July for $15 billion in cash, which is $78 per share. ROH’s share prices tumbled to the low 60s in October, where I picked up some shares. Despite the horrible temporary conditions back in October, the deal still looked solid to me. One, Dow had very few options if it wanted to back out of the deal — Dow would have to pay $750 million if the deal didn’t go through. Two, Dow had sufficient cash to do the deal. Three, Berkshire Hathaway had given financing to Dow.

The most recent setback to the deal is that the Kuwait government has backed out of a joint venture with Dow, a JV that would have provided additional cash to do the ROH deal. On Monday, ROH was in the low 50s. In my opinion the deal has a great chance of going forward. Kuwait backing out on an agreed-upon joint venture is peanuts compared to that horrible first week of October 2008. Comparatively speaking, I think people are overreacting far more this week than they are now. You can see this in ROH’s share price.

I still think that this is a very good risk-arbitrage opportunity. ROH’s price has already risen more than 11% since Monday.

For further reading, see:

Why Dow-Rohm Is No Huntsman-Hexion (Dealbook)

Thoughts on Kuwait Reneging on Dow Chemical JV (ValuePlays)

M&A Arbitrage Opportunities Abound

Posted on October 9, 2008, 10:15 pm. Closed

In this disjointed and frightened market, arbitrage opportunities in merger and acquisition simply abound. There are significant discounts even with the shareholders of the target company having voted “Yes” to acquisition. An investor using due diligence will be able to find good opportunities.

Take a look at this list of pending mergers for ideas.