One man's money-making secret can be another man's poison pill, as two new merger books reveal. In "Merger Mania/Arbitrage: Wall Street's Best Kept Money-Making Secret," Ivan Boesky recalls that he quit stock brokering to seek "a less futile vocation" after suffering unpredictable losses with a certain Natomas Co., losses he recouped only as an arbitrageur years later when Natomas became the object of a hostile takeover. Coincidentally, Dorman Commons, CEO of Natomas during that same takeover, is just now describing it in "Tender Offer: The Sneak Attack in Corporate Takeovers." But despite the double helix that created them, these books bear little comparison, for one is a textbook, the other an adventure story.
"Merger Mania" is rightly billed by its author as "the first comprehensive presentation of the fundamental theory of merger arbitrage." Boesky hopes to end the "tall tales" about his profession by showing its calculated methods while warning that no single book can teach them. But a 247-page book on arbitrage written by a front-page master of the field is bound to raise just such educational expectations--expectations this book could have very nearly satisfied with more sequential and economical editing.
"Merger Mania" begins by explaining basic arbitrage--the art of buying something, such as a commodity, currency or stock, and reselling it later or in a different market for a higher price. More to the best-selling point, Boesky's book shows how merger arbitrageurs apply their craft to profit from big corporate takeovers by buying stock in a target company in the expectation that its price may rise, while simultaneously selling stock (short) in the acquiring company in the expectation that its price may fall.
By taking judicious notes, the reader can learn the formulas involved in such a transaction, starting with the workout value that shows the spread between the buy-sell prices, which in a stock-for-stock transaction involves a blended value; advancing to a return on capital calculation, which entails determining an annual rate of return (adjusted according to the likelihood that a deal will/will not go through) and finally yielding an expected return .
But these precious elements are scrambled in with the book's other riches--repeated historical overview, big names, real cases, stock movement charts, and proxy, prospectus and primer appendixes--while begging 18-karat questions. Like a raided jewelry box, "Merger Mania," has a few things missing.
In the beginning of the book, for example, we learn that merger arbitrage is "the simultaneous purchase of one security and the sale of another that can be exchanged for it." In the case at hand, the arbitrageur will "buy Company B at $7.50 and sell short Company A at $10." Several paragraphs later we read that selling short is the sale of borrowed securities (how to borrow them is never explained) and several chapters later we learn further that such borrowed securities must be sold on an uptick. We are never told how to hedge, although "in merger arbitrage's most basic form, risks are almost always being hedged." And although the probabilities of completion versus sellout are calculations intrinsic to the arbitrageur's decision to invest, Boesky never discusses how to come up with such numbers.
In short, "Merger Mania" will drive you crazy if you think the author is going to tell you all his secrets and in order. But don't skip it. Buy it, skim it and wait for the second edition.
"Tender Offer: The Sneak Attack in Corporate Takeovers" begins with a bang, as Dorman Commons, CEO of Natomas Co., a large energy-based conglomerate with stock selling at $18.50 per share, learns that Diamond Shamrock, a multibillion--dollar chemical company with an eye for oil, is about to announce a $23-dollar-per-share offer for up to 51% of Natomas, its remainders to be mopped up in a stock swap.
In the following 149 fast-paced pages, we experience the minute-to-minute decisions of a 192-hour battle, from defense tactics, through negotiations, through merger aftermath, with technical, personal and philosophical elucidations at the right time and in the proper proportions. "Tender Offer" should be required reading for every CEO with undervalued stock--or an undervalued soul. For this story is told by Commons himself, in an admirably self-effacing style. He did not want to be cast in this Indiana Jones role; events forced him to. And what events!
Should Natomas take a "poison pill" by ruining its own value to ward off acquisition? Should it divest a subsidiary, buy its own stock, buy its acquirer, seek another acquirer? The last route is chosen, leading to high drama in two respects: 1) Commons' convincing explanations of the strategic fit he saw with potential "White Knight" acquirers will fascinate the general reader and corporate planner alike; 2) Commons' personal disappointment at not finding an acquirer, dryly conveyed, is all the more moving:
"The tone was friendly, but I did not see any real interest."
"On Friday, Fred Hartley called to say that Unocal had decided there were other places they would rather put their money. No, I was not surprised."
"My relationship with Kieschnick had not been close. I scanned his face for any recognition of interest. By my reading, Arco was not about to get involved."
Finally, it is time to deal with William Bricker, the CEO of Diamond. In a man-to-man, plan-to-plan negotiation, the two agree upon an ingenious solution, proposed by Commons, who then becomes vice chairman of a combined company board. Then a minor problem comes up, Commons calls Bricker, and ". . . suddenly Bricker was not available. Mr. Rush returned my calls. This proved to be a pattern. From that day forward I neither saw nor heard from Bricker again."
This silent slap, more than the economic indignities of tender offers denounced in the book's conclusions, shows the worst side of hostile takeovers: CEO's inhumanity to CEO. But I for one am glad for Bricker's silence: It was surely the straw that broke this excellent book into print.