Blog > Featured Video > Blog article: Profits in take-over arbitrage
 | Email This Article Email This Article  | 

Profits in take-over arbitrage

Posted July 19, 2008

Laura Cadden on TFN Smart Trading As entire market segments plummet, the stage is set for a wave of corporate buyouts and mergers. Stock expert Thomas Kirchner, of Pennsylvania Avenue Funds, explains how to profit.

by Laura Cadden

Baltimore — (TFN): Looking around the markets in recent weeks you can’t help but notice a pronounced weakness in entire market sectors. As share prices are plunging and credit lifelines become increasingly difficult to come by, the stage could be set for a wave of corporate mergers and buyouts.

My guest today is Thomas Kirchner who not only manages the Pennsylvania Avenue Event Driven Fund, that’s PAEDX, that specializes in tracking mergers, buy outs and other bad deals on his blog. Welcome to the show, Thomas.

Now when the regular investors hear the words take over arbitrage their eyes kind of glaze over. Can you explain for us what exactly you do when you’re leveraging mergers and acquisitions?

Thomas Kirchner: Well what we try to do is we try to capture the difference between the price that the stock is trading up in the run up to a merger and the price at which it is bought out. So that’s typically a very small spread.

What we are effectively doing is we are acting as the buyers of last resort for the investors who have held the stock for a long time and now after getting that big take out premium, they want to sell quickly. They don’t want to wait until the deal goes through.

So we are assuming the risk that the deal does not go through. Most deals of course do go through, but we’re capturing that little price difference between what we can buy it at before the merger closes and the actual closing price of the merger. Because we are capturing that small spread over a very short period of time that gives us a very attractive annualized return.

Profits in take-over arbitrage Laura Cadden: Now, yet, the merger arbitrage and event driven funds have slipped of late. Do you think this is still a viable play?

Thomas Kirchner: I think this has basically been one of the victims of the credit crunch. What has happened is that a lot of deals in the last few years have done very well because they were funded by credit, by cheap credit. Private equity groups could borrow on the cheap and then buy up companies.

Now with the credit crunch that has stopped. So a lot of deals collapsed and we suffered significant losses.

But what has happened in the last few months is that we are now seeing more and more strategic buyers come in. So actual operating businesses rather than financial buyers who are buying up companies and they’re trying to integrate those companies and build new businesses.

As that happens we’re seeing new opportunities and I think the market is slowly recovering.

In addition to that, we’re seeing more and more interest by foreign buyers who are taking advantage of the low dollar.

****View the video here…

Laura Cadden: Especially low valuations, airline, banking, car manufacturers –

Thomas Kirchner: Well I’m not so sure I would want to buy an airline, but yeah, they are definitely financial sector is probably going to be attractive at one point for foreign buyers.

**********

Analysts predict that oil could trade at $175—or even $2251—by December.

But insiders and hedge funds are betting serious money on falling prices. Find out how to follow the smart money…

**********

Laura Cadden: And what about the most public buy out offer in recent weeks of course has been Inbev trying to go after Anheuser-Busch. Given the public outcry about this do you think it will happen?

Thomas Kirchner: I think it eventually will happen when the price is right. There may be a short slip up while the election is going on and I think there’s a short term political risk.

But I think in the long run there are very few anti-trust concerns because they’re really completely separate businesses. One is very successful in Europe; the other one successful in the U.S. So there’s no anti-trust concern.

It is really just a short term political play. If the price is right I’m sure that the company will be sold eventually. Maybe we have to wait until after the fourth of November, but I’m sure it will go through at some point.

Laura Cadden: And how about with car manufacturers? I mean look at Ford, down below five dollars. Do you think there’s an Indian or Chinese or even Russian concern that might swoop in and is that viable?

Thomas Kirchner: I think that’s a possibility, but I wouldn’t bet on it. Some of those first may want to wait until Ford is in even deeper distress or some other car manufacturer is in even deeper distress and they can buy it for even less.

Laura Cadden: So what is the next big merger or buy out that you’re arbitraging right now?

Thomas Kirchner: Right now we are looking mainly at smaller deals. There we are seeing a few that are being bought by foreign companies.

On the larger deal front an interesting transaction is the acquisition of corn products by Bengal that has a very attractive annualized spread, but anybody who’s going to play that has to be careful because there’s a call of provision in there so you have to be careful when you’re hedging that deal. 

Laura Cadden: Well, very good information. Thank you so much, Thomas.

To find out more about Thomas Kirchner’s take over arbitrage fund, go to www.pafunds.com.  For Thomas Kirchner and Today’s Financial News I’m Laura Cadden.

****Make sure you sign up for our FREE TFN News Feed for breaking news, special reports and new financial videos. Sign up through your favorite reader here. Or, if you prefer, have the feed delivered to your email.


Related Articles


Posted by Laura Cadden · Filed Under Featured Video, Podcast, US Stocks and Markets, Videos 

Comments

close Reblog this comment
Powered by Disqus · Learn more
blog comments powered by Disqus