In Joel Greenblatt’s book You Can Be a Stock Market Genius, he advises individual investors should not try M&A risk arbitrage at home. In his view, because the field has become so crowded, typical risk spreads have shrunk so that they no longer compensate for the risks taken. Investors should leave the strategy to the professionals.
Even professionals fail victim to deals that fail to materialize. A recent example is the Air Products & Chemicals’ (NYSE:APD) bid to take over Airgas (NYSE:ARG).
APD has been courting ARG since February of 2010. It raised the bid a number of times, and its final offer of $70 still fell short of ARG’s demand of $78 dollars.
In today’s WSJ, Gina Chon wrote the story entitled “’Poison Pill’ Lives As Airgas Wins Case”. The Delaware Chancery Court upheld the "poison pill" strategy that ARG used to protect itself from hostile takeovers from APD. The reason, according to the article, quoting Chancery Court Judge William Chandler:
He said his decision wasn't an endorsement of a company's ability to say no to a deal indefinitely. Rather, he said his opinion supports the Delaware court's long tradition of respecting "managerial discretion" so long as the board is found to be acting in good faith and abiding by its fiduciary duties.
Even the judge sides with the Airgas BOD and believes the stock is undervalued.
Delaware has been known for being friendly toward management when come to the relationship between management and shareholders. The factor is why most of the US’s companies are incorporated in the state of Delaware, according to the article.
Several Investment Gurus who positioned themselves must feel very disappointed now that the deal fails through. Among them:
Michael Price bought 120,000 shares in the quarter that ended on 12/31/2010;
First Eagle Investment, for which Jean-Marie Eveillard serves as an advisor owns 234,195 shares at the end of the year, an increase of 290.33% from the previous quarter;
Mario Gabelli, who is well know for participating in the M&A deals, owns 268,500 shares as of 12/31/2010, an increase of 221.94% from the previous quarter.
There are also Gurus who probably smelled the unfavorable ruling coming and reduced their original positions:
John Paulson owns 500,000 shares as of 12/31/2010, a decrease of 66.67% of from the previous quarter.
Daniel Loeb owns 400,000 shares, a decrease of 73.33% of from the previous quarter.
Richard Perry owns 164,938 shares, a decrease of 86.87%.
It is interesting to note that Airgas stock price recovered nicely today from an earlier dip, it is up 7 cents and trading at $63.80. Air Products, on the other hand, is trading at $93.88 per share, up 4.07%.
So the fund managers betting on deal have not necessarily lost a lot of money. Lesson learned, even if you want to play in M&A deals, it pays to bet on companies that undervalued to begin with.