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As Deals Get Done, a Hedge Fund Strategy Applauds


Date: Thursday, March 12, 2009
Author: Paula Schaap, Reporter, Hedgefund.net

Despite all the recessionary gloom and doom, deals are getting done in the marketplace of public company mergers. That is good news for the hedge fund strategy known as merger/risk arbitrage.

Ellen Greenspan, chief operating officer and portfolio manager for Havens Advisors, a merger/risk arbitrage firm told HedgeFund.net that when credit dried up in the fall, the assumption was that deals wouldn’t get done.

Indeed, that appeared to be the case for most of the second half of 2008. However, lo and behold, toward the end of the fourth quarter, deals got done again.

“Which is why we had a very strong month in both November and December as we saw north of 20 deals getting completed,” Greenspan said.

Indeed, the HFN Merger/Risk Arbitrage Average tracks Havens Advisors’ experience. The strategy was down 0.30% in November and up 1.43% in December. In 2009, the strategy is down 0.51% year-to-date.

Looking back on what happened in the fall Greenspan said the problem for the strategy was that merger/arbitrage spreads “blew out to huge proportions.”

“That was because a new uncertainty was injected as to the ability to close deals because financing dried up completely,” she said. “That combined with the fact that the economic backdrop was deteriorating, so businesses were doing poorly. Companies that had announced deals months before when the world was different were suddenly faced with a new set of fundamentals.”

However, when deals started up again, Greenspan said, things got better in a hurry.

“If you avoided the disasters and had the staying power to stick it out with your positions until the deals got completed, you ended up being rewarded,” she said.

The pharmaceutical industry especially has been fertile ground for mergers. In January, Pfizer Inc. (NYSE: PFE) agreed to buy Wyeth (NYSE: WYE) for a cash and stock deal worth $68 billion or about $50 per share. Then, on Monday, Merck & Co. Inc. (NYSE: MRK) announced it would acquire Schering-Plough Corp. (NYSE: SGP) for $41.1 billion or about $24 per share.

Damien Conover, an equities analyst with Morningstar, said industry-specific trends were pushing the consolidation in the pharmaceutical sector.

“[Consolidation] has become almost a necessity in that companies are losing their best-selling drugs and don’t have new drugs to replace them,” Conover said.

Although Swiss pharmaceutical company Roche Holding (VTX: ROG) and San Francisco-based biotechnology company Genentech Inc. (NYSE: DNA) have been going back and forth about the deal price for a Roche takeover, this week it appeared as though the companies could be ready to go forward at $95 per share, or about $46.7 billion, for the stake in the Genentech that Roche doesn’t already own.

That is news that is pleasing to at least one merger/risk arbitrage portfolio manager’s ears.

“This month is starting off extremely well since Genentech was our largest position,” Greenspan said.