We explore the performance of risk arbitrage involving three types of merger offers: cash tender,... more We explore the performance of risk arbitrage involving three types of merger offers: cash tender, stock swap, and collar offers for the period between 1990 and 2000. Our result reveals that risk arbitrage for a successful stock offer generates higher returns than a successful cash offer. This finding implies that the profitability of risk arbitrage depends on the level of asymmetric information associated with the payment method. We also find that the beta of typical risk arbitrage positions/portfolios is heavily influenced by the payment method and market conditions
In this paper, we explore the probability of merger completion/success for the 1991 to 2001 perio... more In this paper, we explore the probability of merger completion/success for the 1991 to 2001 period We construct a prediction model for merger completion and, among other issues, test how payment methods/merger types can influence success for three basic types of takeover offers: cash tender, stock swap, and collar. Our multivariate test reveals that takeover attempts offering cash are more likely to succeed than those which offer payment in the form of stock. We argue that the uncertain equity values implicit in the stock payment method accounts for the reduced success rate. A range of exchange ratios (collar offers) tends to improve the chance of success as compared with a fixed exchange ratio. We find that our prediction model, based on both historical and new findings, can be used to improve the risk-adjusted returns of risk arbitrage and related strategies.
The target and bidding firms' return patterns during merger and acquisition attempt periods h... more The target and bidding firms' return patterns during merger and acquisition attempt periods have been researched by many. This article explores how the target shareholder wealth protection which collar offers provide is related to the performance of merger arbitrage positions. More specifically, the authors seek to test how the collar offer deal components which are designed to protect the wealth of the target firm's shareholders relate to both merger arbitrage performance and the probability of success for the takeover effort. The results show that the level of wealth protection relates consistently and positively to the profitability of merger arbitrage and the probability of merger completion, thereby supporting the protection argument made by the authors. The results also show that the decision to use a fixed payment (fixed dollar amount) collar offer rather than a fixed exchange (variable dollar value exchange ratio) collar offer is positively related to the correlation between the target and acquiring firms' stock prices and the growth potential of the target firm. These findings may be of use to both merger arbitragers and those involved in the formulation of takeover offers.
We explore the performance of risk arbitrage involving three types of merger offers: cash tender,... more We explore the performance of risk arbitrage involving three types of merger offers: cash tender, stock swap, and collar offers for the period between 1990 and 2000. Our result reveals that risk arbitrage for a successful stock offer generates higher returns than a successful cash offer. This finding implies that the profitability of risk arbitrage depends on the level of asymmetric information associated with the payment method. We also find that the beta of typical risk arbitrage positions/portfolios is heavily influenced by the payment method and market conditions
In this paper, we explore the probability of merger completion/success for the 1991 to 2001 perio... more In this paper, we explore the probability of merger completion/success for the 1991 to 2001 period We construct a prediction model for merger completion and, among other issues, test how payment methods/merger types can influence success for three basic types of takeover offers: cash tender, stock swap, and collar. Our multivariate test reveals that takeover attempts offering cash are more likely to succeed than those which offer payment in the form of stock. We argue that the uncertain equity values implicit in the stock payment method accounts for the reduced success rate. A range of exchange ratios (collar offers) tends to improve the chance of success as compared with a fixed exchange ratio. We find that our prediction model, based on both historical and new findings, can be used to improve the risk-adjusted returns of risk arbitrage and related strategies.
The target and bidding firms' return patterns during merger and acquisition attempt periods h... more The target and bidding firms' return patterns during merger and acquisition attempt periods have been researched by many. This article explores how the target shareholder wealth protection which collar offers provide is related to the performance of merger arbitrage positions. More specifically, the authors seek to test how the collar offer deal components which are designed to protect the wealth of the target firm's shareholders relate to both merger arbitrage performance and the probability of success for the takeover effort. The results show that the level of wealth protection relates consistently and positively to the profitability of merger arbitrage and the probability of merger completion, thereby supporting the protection argument made by the authors. The results also show that the decision to use a fixed payment (fixed dollar amount) collar offer rather than a fixed exchange (variable dollar value exchange ratio) collar offer is positively related to the correlation between the target and acquiring firms' stock prices and the growth potential of the target firm. These findings may be of use to both merger arbitragers and those involved in the formulation of takeover offers.
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Papers by Ben S. Branch