Just when merger-arbitrage traders thought it was safe to get back into the market, their investments blew out this week like a pair of speakers on an overheated stereo system.
Back on Aug. 15, in the darkest days (so far) of the credit-market malaise, the average difference between the offer prices and the market prices of shares in the 24 largest leveraged-buyout targets was a nearly unprecedented 10.5%, according to Thomson Financial. That meant intrepid traders who do this kind of investing — at such firms as Farallon Capital Management and Stark & Roth — stood to make a bundle if the deals withstood the storm and closed on their original terms.
And make a bundle many of them did. In the ensuing five weeks, as some of the nervousness in the market faded, the average so-called spread collapsed as the value of the stocks skyrocketed. It stood at 5.6% on Sept. 20, according to Thomson.
Then Harman came along and spoiled the party. Since word surfaced Friday, Sept. 21, that the LBO of Harman was in major trouble, arb spreads have blown out again, closing at 7.2% Monday. The fear, of course, is that other private-equity buyers will follow the lead of Kohlberg Kravis Roberts and Goldman Sachs Group and abandon other deals that have been agreed to but have yet to close.
The standouts are Harman (33%), SLM (Sallie Mae — 24%), Acxiom (20%) and Affiliated Computer Services (20%). Whether any of these companies follow in the footsteps of Harman will go a long way toward determining whether the latest setback for arb investors is another opportunity in disguise.
| Top Pending U.S. Private Equity LBOs | |||||
| Target Name | Price Spread Offer Price to Closing Price Aug. 1 (%) | Price Spread Offer Price to Closing Price Aug. 15 (%) | Price Spread Offer Price to Closing Price Aug. 24 (%) | Price Spread Offer Price to Closing Price Sept. 20 (%) | Price Spread Offer Price to Closing Price Sept. 24 (%) |
| Harman International | -3.38 | -6.38 | -5.16 | -6.46 | -33.08 |
| Acxiom | -7.64 | -16.61 | -8.89 | -16.64 | -24.17 |
| SLM Corp. | -18.78 | -22.08 | -16.92 | -19.6 | -20.35 |
| Affiliated Computer Services | -14.6 | -18.89 | -21.79 | -19.55 | -19.84 |
| Penn National Gaming | -14.76 | -16.15 | -12.16 | -10.51 | -12.42 |
| Cumulus Media | -10.89 | -20.6 | -12.17 | -9.79 | -11.49 |
| Guitar Center | -6.54 | -12.7 | -6.75 | -4.98 | -10.83 |
| United Rentals | -7.83 | -11.88 | -5.36 | -6.03 | -10.49 |
| Clear Channel Communications | -5.94 | -10.43 | -6.12 | -4.13 | -6.22 |
| Sequa | -6.4 | -4.86 | -2 | -3.52 | -5.84 |
| Avaya | -4.91 | -7.26 | -3.2 | -3.09 | -5.71 |
| Alliance Data Systems | -6.42 | -10.43 | -5.63 | -2.91 | -4.89 |
| Ceridian | -6.89 | -9.03 | -5 | -2.64 | -4.44 |
| Manor Care | -6.04 | -8.78 | -4.81 | -3.16 | -4.01 |
| Ryerson | -5.25 | -11.3 | -6.49 | -4.46 | -3.54 |
| Station Casinos | -4.01 | -5.79 | -2.76 | -2.62 | -3.44 |
| Harrah’s Entertainment | -6.51 | -7.61 | -4.82 | -3.21 | -3.42 |
| Catalina Marketing | -6.46 | -5.45 | -3.54 | -2.28 | -3.11 |
| Alltel | -7.27 | -7.76 | -4.83 | -2.6 | -2.66 |
| Hilton Hotels | -7.47 | -6.8 | -3.37 | -2 | -2.46 |
| Bausch & Lomb | -3.78 | -4.68 | -2.54 | -2.11 | -1.82 |
| TXU | -5.63 | -8.45 | -4.12 | -1.62 | -1.81 |
| Archstone-Smith | -5.88 | -8.53 | -2.98 | -1.73 | -1.53 |
| CDW | -3.68 | -4.6 | -1.99 | -1.26 | -1.33 |
Source: Thomson Financial
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