About the Author xi

CHAPTER 1

Introduction 1

CHAPTER 2

What Is Risk Arbitrage? 9

CHAPTER 3

The Risk Arbitrage Industry 27

CHAPTER 4

Estimating the Return on a Risk Arbitrage Position 33

CHAPTER 5

Estimating the Risk of Arbitrage Transactions 61

CHAPTER 6

Estimating the Probability of a Transaction’s Occurrence 83

CHAPTER 7

The Risk Arbitrage Decision Process 107

CHAPTER 8

Hostile Takeovers 117

CHAPTER 9

Trading Tactics 149

CHAPTER 10

Portfolio Management 173

CHAPTER 11

The Exciting World of Risk Arbitrage 201

APPENDIX A: Tender Offer Document 215

APPENDIX B: Airgas/Air Products—Text of Court Decision 281

APPENDIX C: Whole Foods Markets—Excerpts from Proxy Statement 291

APPENDIX D: Straight Path Communications—Excerpts from Proxy Statement 299

APPENDIX E: Straight Path Communications—Excerpts from STRP’s 8-K Filed on April 13, 2017 329

Acknowledgments 337

Index 339

Advance Praise for Risk Arbitrage: An Investor's Guide, 2^nd Edition

"Whenever I think of risk arbitrage, I am reminded of the old Wall Street proverb, 'Give a man a fish and you feed him for a day. Teach him how to arbitrage and you feed him forever.' With the skills learned from Moore's book, you will never go hungry."
—Paul D. Sonkin, co-author of Pitch the Perfect Investment: The Essential Guide to Winning on Wall Street

"Keith provides good insights for looking at risk arb from multiple prisms, and in particular, from a legal point of view. A must read for those seeking investment opportunities generating absolute returns."
—Mario Gabelli, founder, Chairman, and CEO of GAMCO (Gabelli Asset Management Company) Investors, Inc.

"Keith Moore is that rarest of birds in Wall Street. A highly experienced practitioner of one of the investment community's more arcane arts who also boasts the intellectual curiosity and firepower to delve deeply into the hows and whys of situations that have led to both spectacular investment successes and failures in the field. Not to mention the tenacity to pursue those explanations not only in the trenches of the Street but through the academic research that resulted in his PhD — and has enriched the educations of countless business students. Now, in his trademark precise prose, Keith has updated his groundbreaking 2000 book on Risk Arbitrage, to the great good luck of a new generation of prospective practitioners."
—Kate Welling, Editor and Publisher of Welling on Wall St., an online journal for professional investors, and author of Merger Masters (Columbia University Press, 2018)

"Seldom do financial books become page turners, but the presentation in Keith Moore's book grabs the reader more like a novel than a textbook. A blend of great story telling, theoretical rigor, and practical experience, this book provides an outstanding approach to the risk arbitrage process, with explanations of not just what and why but also of how and when. The book is up to date and replete with the details of actual cases."
—Dennis McLeavey, Ram Fund Advisor, Professor Emeritus of Finance at the University of Rhode Island, and former Vice President of Curriculum Development at CFA Institute

The current wave of corporate mergers, acquisitions, restructurings, and similar transactions has created unprecedented opportunities for those who are savvy in the ways of modern risk arbitrage techniques. At the same time, a variety of factors impacting how M&As are conducted has lent such transactions a much higher degree of predictability than ever before, making risk arbitrage more attractive to all types of investors.

Despite the growing popularity of this type of investing, with the exception of the first edition of this book, there continues to be a surprising lack of expert guides to risk arbitrage investing. Hailed by one enthusiastic reviewer as the "first systematic attempt to break the silence around the secrets of the investment and trading strategy that exploits these corporate restructurings," the first edition of this book, for the first time, made risk arbitrage available to anyone interested in learning how it's done.

But a lot has changed in the industry over the past decade. The rapid growth of the hedge fund industry, along with the changing nature of M&As has greatly affected the process of risk arbitrage and the techniques used to participate in it. And while Risk Arbitrage is still universally recognized as the definitive book on the subject, it was time for a revamping of the original. In creating Risk Arbitrage, Second Edition, Keith M. Moore took pains to make it as current as possible without losing any of the qualities and features that earned that modern classic its reputation. Thoroughly updated and revised, this new edition:

• Reflects all important changes to the laws, practices, and technologies
• Provides deep insights into new policies affecting merger transactions
• Includes many new case studies of both successful and unsuccessful risk arbitrage investments
• Addresses developments that now let individuals successfully compete with the pros
• Features a detailed discussion of computer- based trading systems
• Details techniques for computing spreads on cash deals, stock deals, and mixed transactions
• Shows how to determine downside, upside, market-adjusted, and total risk
• Contains numerous practice exercises that help you master the methods described

Designed to get you quickly up to speed on basic risk arbitrage concepts, terminology, and equations, as well as the latest investing and trading strategies and techniques. Risk Arbitrage, Second Edition is your guide to safely navigating and profiting from one of today's most exciting investment opportunities.