UAL Deal May Cost ‘Arbs’ Up to $1 Billion on Paper

The further drop Tuesday in UAL stock added more pressure on Wall Street’s arbitragers, or takeover stock speculators, who are believed to have suffered paper losses of $400 million to $1 billion on the failed deal.

Wall Street was swept again by rumors that one or several small arbitrage firms may have been forced out of business by the plunge, although the identities of such firms did not emerge.

“This has separated the chipmunks from the gerbils,” said Guy Wyser-Pratte, head of arbitrage of Prudential-Bache Securities. “Some of the smaller guys may not be able to pick themselves up.”

As the stock dropped sharply early Tuesday on news that UAL’s board had backed away from a buyout plan, some arbitragers were forced to sell other stock holdings to satisfy lenders calling in margin loans. The arbitragers’ stock sales helped drive down other takeover-speculation stocks, such as American Airlines’ parent AMR, which fell $1.75 to $68.875, and USAir, which lost $2.375 to $40.125.

UAL’s recovery late in the day raised some arbitragers’ hopes that another bid, from real estate magnate Donald J. Trump or some other source, might cut their losses. UAL stock ended down $8.375 at $170.

Many of the street’s 125 to 150 arbitrage concerns began buying the stock in late August, when it was lifted from around the $170-a-share range by investor Marvin Davis’ $240-a-share tender offer. Many other, more cautious firms bought in at around $280 a share after a management-employee group’s $300-a-share offer was announced. The stock peaked at a value of $290.25.

William LeFevre, market analyst with the Advest Inc. regional brokerage, speculated that arbitragers may hold 45%, or about 9 million shares, of UAL. By his reckoning, they have averaged losses of about $100 a share, for total paper losses of $900 million.

An institutional brokerage executive who deals with many of the street’s “arbs” insisted that their losses should not be overstated. “I think this has wiped out maybe one-third to 100% of this year’s profits for a lot of firms,” he said. “But I don’t think this is going to force them to cut into the principal they began the year with.”

He said the greatest pressure would be on the dozens of small firms that operate with one or two traders and a small support staff and invest about $10 million.

Collectively, arbitragers control about $5 billion, although the number rises and falls quickly, traders say.

One arbitrager, who declined to be identified but acknowledged heavy losses, said selling her 40,000-share position was “one of the toughest things I’ve had to do.” But she added that if the stock rebounds today on a new offer, “you can bet the experience will feel even worse.”