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John Paulson Arbitraging Berkshire’s Unclosed Lubrizol Acquisition

May 25, 2011 | About:
Holly LaFon

Holly LaFon

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Hedge fund manager John Paulson bought 6 million shares of Lubrizol Corp. (LZ) stock in the first quarter to arbitrage the upcoming merger between the company and Berkshire Hathaway (BRK.A)(BRK.B). It was his second largest new position in the first quarter. Before becoming famous for his enormous returns during the credit crisis and subsequent investments, Paulson mainly engaged in risk arbitrage. He still has arbitrage funds, which are his oldest. His Lubrizol investment is likely for one of these funds.

Berkshire announced on March 14 the transaction valued at $9.7 billion or $135 per share. The purchase price represented a 28% premium over the stock’s closing price on March 11. The merger announcement sent the stock price up 28%, near where it has hovered to date. On Wednesday, Lubrizol’s stock is at $134.25 per share, 75 cents below Berkshire’s selling price.

The Berkshire acquisition is not slated to close until the third quarter this year. It is still pending shareholder approval, regulatory approvals and other closing conditions, which have been delayed due to an SEC investigation into David Sokol’s Lubrizol trades. Lubrizol, however, mentioned its “pending acquisition” by Berkshire Hathaway several times in its first-quarter earnings results. For instance, it will not hold a conference call to discuss the results and will pay its last quarterly dividend due to the pending acquisition. In Lubrizol’s SEC filing, it stated that, “failure to complete the transaction with Berkshire Hathaway Inc. could impact negatively our stock price, future business and financial results.”

Though the company has stated its intention to close the deal, it also mentioned in its quarterly SEC filing that several class actions lawsuits had been filed against it. The suits allege that the company had “breached their fiduciary duties to the company’s shareholders by agreeing to enter into the transaction for an allegedly unfair price and as the result of an allegedly unfair process, and that the shareholders have not been provided sufficient information about the proposed merger.”

The lawsuit also alleges that Berkshire Hathaway aided and abetted the directors in breaching their duties and aims to get an injunction against the closing of the merger as well as to have the merger agreement rescinded.

Lubrizol stated that the allegations “lack merit” and that it will “defend itself vigorously.”


Rating: 2.3/5 (18 votes)

Comments

Toddius
Toddius - 2 years ago
I think the chance of the deal closing are very high, considering BRK's involvement, but it still seems like he's taking a substantial risk based on the price - I don't know what price he got in at - but if he's still buying in order to make around a dollar a share - when the stock will drop $20 if the deal were to fail - that seems like a poor trade off. A 90% chance of making $1 vs. a 10% chance of losing $20 is a losing proposition (0.90 vs. 2). Obviously he has access to information that I don't. Perhaps the probability of the deal going through is much higher in his mind. There's always a risk, though - especially when there's a contingent of shareholders fighting it.

One thing that has really hurt Buffett the last few years - shareholders always think they're selling too cheaply if he's interested (Clayton Homes, no Lubrizol).

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