Merger Arbitrageurs: Corporate Rapists or Just Plain Thugs

The financial world uses all sorts of obscure language to hide their shabby activity from the public gaze. If the general public was aware, it might demand laws to make much of the action illegal, or at least terminally taxable. The phrase, merger arbitrageurs, is a typical example of such obfuscation. It sounds fairly technical and sophisticated, but is really nothing of the kind. It’s simply making money betting on the outcome of takeovers, either succeeding or falling apart.

A lot of money can be made. For example, hedge fund manager, Tyrus Capital, launched by someone referred to in the Financial Times as a “star trader”, raised $800m on its first day and doubled that in a matter of months. Imagine a humble manufacturer of widgets, employing real people, attracting such support. And the activity is expected to grow further. Tim Beck, a senior research analyst at the Stenham hedge fund told the FT. “Corporations have improved their balance sheets and cut fat. They have a lot of cash now. To grow in the difficult economic environment, they will have to purchase or merge with other companies.”

So the prospect for merger arbitrageurs looks good. Not only do corporations have the cash to grow by such deals, but the market is increasingly global. Cadbury’s $18.9 billion takeover by Kraft not only attracted arbitrageurs like hyenas to the kill, but in truth they activated the deal, in the end possessing a third of all Cadbury shares. And, of course, making huge profits. That encouraged the idea that more American firms would attempt such huge deals. UK companies were particularly vulnerable as they appeared to be completely unprotected, unlike firms in most other jurisdictions.

Hostile bids are an increasingly important source of arbitrageur profit. But corporations in Japan and Germany are largely protected from hostile bids by their unique system of cross shareholdings and, in Germany’s case, employee representation on the supervisory boards which take M&A decisions. In the industrialising economies, such as China and India, corporations are protected by large, if not still controlling, governmental share holdings. In other jurisdictions, governments are increasingly prone to step in to defend national interests, for example BHP Billiton’s recent $39bn bid for Canada’s PotashCorp, blocked by the Canadian government on the grounds that a foreign buy-out would not be of “net benefit” to Canada. Only in UK are firms so exposed.

As the industrialising economies grow they are themselves becoming increasingly active in M&A. In the main this has so far been through non-hostile deals. However, state backed hostile bids are starting to emerge, for example, Korea National Oil Corporation’s hostile takeover of Scottish oil company, Dana Petroleum. As the emerging economies seek to secure access to natural resources, such hostile bids can be expected to grow, especially when China starts down that road.

So far so good for the merger arbitrageurs. They look set to make many killings. But someone loses out. The companies so acquired, lose the power to influence their own strategic development. Strategic decisions for Cadbury are now made at Kraft headquarters, where it might be expected that the Rowntree experience, following Nestlé’s 1987 $2.55bn acquisition, would be repeated: the brand being removed from products and jobs being moved abroad. And in less high profile deals where the media are less concerned, the result will be closures, asset disposals, and the “release” of people. That’s corporate rape or just plain thuggery.

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