possible if there are not enough arbitrageurs participating in the merger. As
a consequence, the spread dynamics do not imply anything.
Figure 11.4b is a plot of an unconverged spread. The bidder in this case
was Berkshire Hathaway (whose chairman was the famous Warren Buffet).
The target was General Re, a reinsurance company. The deal was an-
nounced June 19, 1998, and completed December 21, 1998. It is interesting
to note that the spread on close was about $ 4.00; that is, the convergence
to zero did not happen. To see why that would be the case, note the fact that
Berkshire stocks were priced very high, and the exchange ratio was about
0.0035; that is, for every thousand shares of General Re we would need 3.5
shares of Berkshire to be perfectly hedged. This awkward exchange ratio is
hard to achieve given the average per-trade volume of General Re and Berk-
182 RISK ARBITRAGE PAIRS
FIGURE 11.4A Inverted Spread (Z-TSA).10 30 50 70 90–2–1Spread on Close012FIGURE 11.4B Unconverged Spread (BRK-GRN).08020 40 60 100 120 1400Spread on Close
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