Risk Arbitrage in Tender Offers

Abstract

zewski. T he merger mania that began in the late ' 1970s has been uniquely characterized by the extensive role risk arbitrageurs played in the process of mergers and acquisitions. In general, risk arbitrage is the purchasing of securities immediately after the announcement of a merger, when the arbitrageur attempts to lock in the fixed spread between the offer price and the post-announcement market price for the target firm. The door to the vault holding the well-kept secret about risk arbitrage was not opened until after the mid-1980s when SEC charges were made known to the world (Holderness and Sheehan [1985]). Ironically, Ivan Boesky, who was charged by the SEC with insider trading offenses in November of 1986, was the one who brought risk arbitrage out into the open and helped dissipate some of the mystery surrounding it (Boesky [1985]). The removal of the shroud covering risk arbitrage trades along with the help of brokerage houses led to an influx of non-professional investors into market risk arbitrage situations (Laracker and Lys [1987], Sender [1985]). As amateur traders began to participate in the profit opportunities that traditionally had been the privilege of professional arbitrageurs, tender offer spreads were reduced quickly. Target company stock prices, moreover, were often bid above tender offer prices just on the chance that a rival bidder would appear (Marcia1 [1983], Welles [1981]). The arbitrageur has an information-gathering network of professionals to help evaluate potential takeovers, as well as to help monitor the progress of a takeover attempt. These professionals include investment bankers, lawyers, consultants, and other arbi-