(^2) I. F. Boesky, Merger Mania-Arbitrage: Wall Street’s Best Kept Money Making Se-
cret. New York: Holt, Rinehart and Winston, 1985.
mium. For Bernard Baruch and other players of the day, this presented a
good arbitrage opportunity.
America experienced its first merger boom in the early 1900s. Shares of
one company could be exchanged for shares of another for the first time.
There were plenty of deals. Subsequent merger booms occurred in the 1920s,
1960s, 1980s, and late 1990s. Risk arbitrage was practiced in some form or
another during these periods with the arbitrageurs acting as market makers
for investors.
The practice of risk arbitrage in its modern form probably started a lit-
tle after World War II. In the early days, it was done by an exclusive club of
stock traders. Some of the individuals in the group were Gustave Levy, later
senior partner at Goldman Sachs; Salim Lewis of Bear Stearns; Harry Cohn
of L.F. Rothschild; Joseph Gruss of Gruss & Co; and Eugene Wyser-Pratt of
Bache. The group was secretive about their trading methods, and the prac-
tice was shrouded in mystery. The trading was, however, based on publicly
available information.
Then, in the mid 1980s Ivan Boesky wrote a book^2 on risk arbitrage,
and a lot of the details on the practice of risk arbitrage came to be known
publicly. Later, when the SEC charged him with insider trading offenses, the
practice of risk arbitrage took a big hit. It took a while for the erroneous per-
ceptions to come to terms with the fact that risk arbitrage can indeed be
practiced based on information gathered from public sources. Since then, the
business has rebounded and competition in the marketplace has steadily in-
creased. There are now quite a few mutual funds and hedge funds specializ-
ing in risk arbitrage.
The Deal Process
One of the crucial components in the practice of risk arbitrage is the under-
standing of the deal process. Any discussion on the subject matter without
talking about the deal process would be incomplete. Let us therefore briefly
outline various steps involved in a deal. The term dealis used generically to
refer to both mergers or exchange offers. In the ensuing discussion we will
highlight both the similarities and the differences between them.
The typical chain of events leading to a merger is as follows. First, the
two companies do their due diligence on each other’s business and sift
through the nitty-gritty. The attorneys for both the companies then draft a
contract known as a definitive agreement. The two companies then make
the announcement through a joint press release. In some instances, the
Risk Arbitrage Mechanics 141