Yet another victim of the credit crunch
Pity the poor merger arbitrageur. These fellows specialize in buying shares in firms that look they are about to be bought playing the odds that they will come out winners when the bidding war is over. However, the credit crunch and the sudden slowdown in dealmaking is making their life miserable.
According to the Wall Street Journal story ("Flight of the Merger 'Arbs': Risk-Takers Fear Dead Deals", 8/17/07), the situation is dire. "After watching their investment portfolios get pummeled by a string of concerns about pending mergers, traders who specialize in buying shares of companies that they expect will be taken over -- known as merger arbitragers, or "arbs" in Street parlance -- are selling some of their holdings.
According to the article, more than 20 funds with nearly $25 billion in capital are down over 3% in the first half of August, and it may get worse yet. As a result, investment funds have been eager to sell off their shares in financing takeover that are now in trouble."
And the broken or delayed deals of the last few months may be just the tip of the iceberg. "Last week, the already jittery deal market got spooked by Home Depot, which said it delayed and is renegotiating a $10.3 billion deal to sell its construction-supply business to private-equity firms Bain Capital, Carlyle Group and Clayton, Dubilier & Rice."
Other pending leveraged buyouts that are in some degree of jeopardy are First Data, SLM (Sallie Mae), Clear Channel Communications, TXU, Hilton Hotels, BCE (Bell Canada), and Harrah's Entertainment. Arbitrageurs are holding stock in all of these companies and their money is now at significantly at risk, especially since, if the deals fall through, the inflated stock prices are likely to plummet.
Over the past few years, with rising valuations and slam-dunk buyouts, the role of a merger arbitrageur has been easy money. No longer.
