HF Itw: Merger Arbitrage Case Study
Have been asked by PM of a HF I am interviewing with to have a think about a recently announced merger between two companies (they do merger arbitrage).
He wants to see the approach I would take in order to assess the opportunity, how methodical I am and assess my ability to go into details in any considerations I would raise. He mentionned I should have my own view about valuation as the offer doc, for him, is biaised..
Would be keen to hear your views about how you would structure your approach and what aspects you normally look at in these situations.
Pretty sure that would be usefull to any monkey interested in event-driven strategies..
Edit: it is a precise merger they are looking at right now I need to work on
Rock-Tenn's acquisition of Smurfitt would be a great option to examine to see how some really smart investors look at event-driven investing. It has all the hallmarks of a good arb case: 1) Recently re-orged/potentially undervalued target 2) Decent amount of smart money invested in the target (see Monarch, 3rd Point, et al's letter to the SSCC Board) 3) Interesting management incentives (as discussed in #2) 4) Combo cash/stock purchase price. 5) VERY biased offering doc valuation that followed on the heels of a highly contested bankruptcy valuation (discussed in detail in #2).
I would hesitate to use this as your actual case to present since it may look like you cribbed, but you should consider reading up on it to see how the activist/distressed investors who are holders of SSCC make their case for a higher purchase price.
http://www.distressed-debt-investing.com/2011/02/distressed-event-drive…
Thanks for your inputs so far - any other view?
I recommend "Risk Arbitrage" by Guy Wyser-Pratte as well, if you have time to get a copy and read it. He presents some exercises that can help you consider the "math" involved in the arb.
http://www.Amazon.com/s/ref=nb_sb_ss_i_0_16?url=search-alias%3Daps&field-keywords=merger+arbitrage&sprefix=merger+arbitrage
Solid answer Kenny_Powers_CFA
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