Merger Arbitrage & Margins

Quote from bestfriend:

I blew another $65,000 Friday and am down to 40,000 HIB but I'm thinking now this deal is going to happen on Sept 7 as indicated by the last press release.

Capital One and Hibernia could extend the closing date to a future time so that both parties could do due diligence. Suppose that you contracted to buy a house for $1 million. The day before closing, there is flooding and your house is damaged. Does this mean that you have to buy the trashed house at $1 million and fulfill the terms of the mortgage? Of course not. Likewise, Capital One has to look out for their shareholders and thus it would be unproductive to close the deal on September 7 unless there is an accurate assessment of what is going on in New Orleans and HIB's loan portfolio. Unfortunately, this will probably take quite a bit of time.

I have a number of reasons for this belief, chief among them :

1) COF has a great opportunity for wonderful PR>


Capital One has already donated $1 million to the relief effort.

http://www.prnewswire.com/cgi-bin/stories.pl?ACCT=104&STORY=/www/story/08-30-2005/0004096923&EDATE=


2) HIB will eventually profit because NO has to be rebuilt. The Port of NO is the strategic focal point for the US economy. HIB has a huge market share in LA.

Yes, but what happens if the soil in contaminated with hazardous material?

3) HIB had as great disaster recovery plan in place.

They could have, but this is irrelevant to the closing of the deal.

4) HIB is big in business banking.

Once again, this could be true, but it is irrelevant to the closing of the deal.

5) HIB has come up with an automatic payment deferral until January for loans up to $1 million.

Yes, but this means that HIB's loans are non-performing assets. T

If the deal is scotched, I will be looking to acquire HIB shares at lower prices.

Thus, my opinion is that there is not enough information for both COF and HIB to close this deal on September 7. Capital One needs to look out for their shareholders and without adequate due diligence, it would be quite foolish for Capital One's management to close so soon.

Remember, with a March 2006 walkaway date and a material adverse condition with regard to HIB's business, there is no rush for COF to close this deal anytime soon.
 
The market is certainly telling us that this thing isn't closing Sept.7, at least not at the originally agreed upon price. This is not to say that it's impossible, but it will be one hell of a move Tuesday if it closes.

Good luck to you
Arb
 
Quote from bestfriend:

Who do I blame for the Hibernia nightmare? Why, George Bush, of course. He cut $70 million from the Army Corps of Engineers budget for New Orleans. What a dumbass, or as they say in Cajun, "Dumas"

if someone as naive as you can make money, anyone can.

and who asked you "who you blame," bozo? what has that got to do with -- and here's the funny part -- a "merger arbitrageur" who trades with IB? It's like Carl Icahn using an eTrade account.

yet another poseur.
 
don't let facts dissuade you from your chosen path of denial:

The Left in the US seems determined to find any angle (ranging from the irrational to the psychotic) to pin the blame of the devastating Hurricane Katrina on President Bush. They have tried so far: the global warming caused it angle, strike one; not enough Louisiana National Guard troops due to the war in Iraq, strike two; now, Bush cut money earmarked for flood control due to the war in Iraq, hopefully strike three.

The latest idea is floated by sometime journalist, sometime Clinton policy advisor, and sometime litigant Sidney Blumenthal. His latest missive can be found in Speigel Online, natch:

"In 2001, FEMA warned that a hurricane striking New Orleans was one of the three most likely disasters in the U.S. But the Bush administration cut New Orleans flood control funding by 44 percent to pay for the Iraq war.

In early 2001, the Federal Emergency Management Agency issued a report stating that a hurricane striking New Orleans was one of the three most likely disasters in the U.S., including a terrorist attack on New York City. But by 2003 the federal funding for the flood control project essentially dried up as it was drained into the Iraq war. In 2004, the Bush administration cut funding requested by the New Orleans district of the U.S. Army Corps of Engineers for holding back the waters of Lake Pontchartrain by more than 80 percent. Additional cuts at the beginning of this year (for a total reduction in funding of 44.2 percent since 2001) forced the New Orleans district of the Corps to impose a hiring freeze. The Senate had debated adding funds for fixing New Orleans' levees, but it was too late."

There is also wasted space regarding the debunked global warming nonsense. Well, what was the Clinton Administration policy on floods, hurricanes, and the sort in Louisiana? Using the same source as Mr. Blumenthal, the Times-Picayune, we find the following via Lexis-Nexis:

February 17, 1995

An Army Corps of Engineers "hit list" of recommended budget cuts would eliminate new flood-control programs in some of the nation's most flood-prone spots - where recent disasters have left thousands homeless and cost the federal government millions in emergency aid.

Clinton administration officials argue that the flood-control efforts are local projects, not national, and should be paid for by local taxes.

Nationwide, the administration proposes cutting 98 new projects in 35 states and Puerto Rico, for an estimated savings of $29 million in 1996.

Corps officials freely conceded the cuts, which represent only a small portion of savings the corps ultimately must make, may be penny-wise and pound-foolish. But they said they were forced to eliminate some services the corps has historically provided to taxpayers to meet the administration's budget-cutting goals.

June 23, 1995

A hurricane project, approved and financed since 1965, to protect more than 140,000 West Bank residents east of the Harvey Canal is in jeopardy.

The Clinton administration is holding back a Corps of Engineers report recommending that the $120 million project proceed. Unless that report is forwarded to the Office of Management and Budget, Congress cannot authorize money for the project, U.S. Rep. William Jefferson's office said Thursday.

On June 9, John Zirschky, the acting assistant secretary of the Army and the official who refused to forward the report, sent a memo to the corps, saying the recommendation for the project "is not consistent with the policies and budget priorities reflected in the President's Fiscal Year 1996 budget. Accordingly, I will not forward the report to the Office of Management and Budget for clearance."

July 26, 1996

The House voted Thursday for a $19.4 billion energy and water bill that provides $246 million for Army Corps of Engineers projects in Louisiana.

The bill, approved 391-23, is the last of the 13 annual spending measures for 1997 approved by the House.

One area in which the House approved more financing than the president requested was for flood control and maintenance of harbors and shipping routes by the Army Corps of Engineers.

Flood control projects along the Mississippi River and its tributaries were allotted $303 million, or $10 million more than the president wanted.

June 19, 1996

The Army Corps of Engineers, which builds most flood protection levees on a federal-local cost-sharing basis, uses a cost-benefit ratio to justify a project. If the cost of building a levee is considered less than the cost of restoring a flood-ravaged area, the project is more likely to be approved.

For years, the Jean Lafitte-Lower Lafitte-Barataria-Crown Point areas couldn't convince the corps they were worthy of levee protection. But the use of Section 205 and congressional pressure has given the corps a new perspective, Spohrer said.

But even so, when the Clinton administration began to curtail spending on flood control and other projects a year ago, the corps stopped spending on Section 205 projects even after deciding to do a $70,000 preliminary Jean Lafitte study, Spohrer said.

July 22, 1999

In passing a $20.2 billion spending bill this week for water and energy projects, the House Appropriations Committee approved some significant increases in financing for several New Orleans area flood control and navigational projects.

The spending bill is expected on the House floor within the next two weeks.

For the New Orleans District of the Army Corps of Engineers, the panel allocated $106 million for construction projects, about $16 million more than proposed by President Clinton.

The bill would provide $47 million for "southeast Louisiana flood control projects," $16 million for "Lake Pontchartrain and vicinity hurricane protection," $15.9 million for the Inner Harbor Navigation Canal Lock on the Industrial Canal in New Orleans and $2 million for "West Bank hurricane protection -- from New Orleans to Venice."

Most of the projects received significant increases over what the Clinton administration had proposed. The exception: general flood control projects for southeast Louisiana, which remained at the $47 million suggested by Clinton. Local officials had hoped for double that amount.

February 8, 2000

For the metropolitan New Orleans area, Clinton's budget was seen as a mixed bag by local lawmakers and government officials. For instance, while Clinton called for $1.5 billion to be spent at Avondale Industries to continue building LPD-17 landing craft, his budget calls for significantly less than what Congress appropriated last year for Lake Pontchartrain and vicinity hurricane protection and for West Bank flood control projects.

September 29, 2000

The House approved Thursday a $23.6 billion measure for water and energy programs, with sizable increases for several New Orleans area flood-control projects. The Senate will vote Monday, but it may be a while before the bill is enacted.

President Clinton is promising to veto the annual appropriation for the Energy Department and Army Corps of Engineers, not because it is $890 million larger than he proposed, but because it does not include a plan to alter the levels of the Missouri River to protect endangered fish and birds.

May 8, 2005 (extra)

Ten years ago today, the Bonneaus and hundreds of thousands of New Orleans area residents rode out a rain unlike any they had ever experienced. The flood killed six people and generated more claims than any in the history of the National Flood Insurance Program. In its aftermath, Congress created a new role for the U.S. Army Corps of Engineers, and federal and local governments spent more than a half-billion dollars to widen and line drainage canals, bury culverts bigger than cars and beef up pumping stations.

But not even those improvements could prevent massive flooding if a storm of similar intensity were to strike today.

<a href="http://eurota.blogspot.com/2005/09/us-left-all-straws-clutched-every.html">source.</a>
 
To A Pismo, you haven't been reading my postings closely enough. You simply wanted to refute my belief that Bush is responsible.So, I believe you have confused me with the guy trading merger arb through IB.

My point about Bush is seemingly missed by your posting selective news quotes. Or, maybe I wan't clear.Truman had a sign on his desk saying."The Buck Stops Here." Bush's says, "The Buck Stops .....over there or over there or over there somewhere."

To Freehouse: I orginally took your point of view on each issue, shared this with my cohorts, changed my opinion and posted it on ET, and, now, frankly, after more research I have come full circle and think the strategic rationale has been compromised.
In short, I do not see the deal closing at all, and think there's no reason for HIB to waste any more time or money dealing with extensions. Part of COF's rationale was access to low cost funding and a branch banking network. Given the stress likely to be applied to HIB's liquidity position, I don't see the rationale applicable for some time, if ever.

I wrote a lengthy position paper detailing the research I did in the last 24-36 hours and sent it to my fellow arb traders. My conclusion about the deal rests largely on a very few points. Toxic contamination is one of them. No lender will grant a first mortage, and no insurer will sell liability insurance for structures built on contaminated property. Actually, this was part of my original analysis last week--which I unfortunately changed before posting on ET. I also examined the entire text of the NFIP flood policies for residential and commercial structures, and spoke with insurance experts regarding LA property insurance forms.
One of the keys to evaluating insurance coverage is an understanding of insurance law. If my uninsured neighbor's house burns down causing smoke damage to my house, my claim is for "direct loss by fire, " not for smoke. Unfortunately forms in LA preclude windstorm as the direct cause of the loss, as they exclude, "rising water, whether wind-driven or not"....continued
 
continued...to freehouse.

There are only a few points freehouse makes with which I might marshall some degree of disagreement. For all practical purposes he is right about the extensions granted being non-performing assets. However, regulatory forebearance is likely to be granted regarding the extensions that were automatically granted.

There are some interesting and very scary comments from EPA, such as , "There isnt enough money in the US GNP to clean up the toxic exposure..."

To ArbProfit, I would generally agree with the market's assessment of a situation, but not exclusively. Indeed, it IS possible to understand the situation better than most participants if one understands alll the legal, regulatory,and other aspects. I do agree this deal ain't happening September 7th. But, I make my living understanding things better than most market participants. Unfortunately, here, I have come to the dance too late.

Back to A Pismo's second post: "If someone as naive as you can make money, anyone can..."
I've grossed over $ 5 million trading risk arb in 7 years, so I think your judgment is being clouded by your rush to refute my comments about Bush, which, indeed, is all you have attempted that even speaks to an accurate assessment of me.

As to your third post, it's just selected drivel. It includes the statement "...ranging from the irrational to the psychotic..."
Of course this excludes even the minute possiblity that anyone blaming Bush is ever .0000001 % correct. At a minimum they are "irrational." You are saying their comments can ONLY be somewhere between irrational and psychotic. I can only suggest you look up "ad hominem " in the dictionary. You are simply wrong in not ascribing any blame to the President. Further, you have leaped to the conclusion that anyone criticizing him is a liberal. Piz, I don't think the clouds are surrounding MY judgment, only my net equity.

I read a few more of your selected dateline comments, and I can only conclude you must think that Bill Clinton is still in office.
You need to face the fact that my criticism of Bush is no more or no less than what it would be of any other sitting President in such a sitaution.
 
The only issue now is how much more I lose. Anyone want to bet whether the Press Release is out before the Tuesday opening? I'll take Yes.
 
Quote from bestfriend:

continued...to freehouse.

There are only a few points freehouse makes with which I might marshall some degree of disagreement. For all practical purposes he is right about the extensions granted being non-performing assets. However, regulatory forebearance is likely to be granted regarding the extensions that were automatically granted.

There are some interesting and very scary comments from EPA, such as , "There isnt enough money in the US GNP to clean up the toxic exposure..."

To ArbProfit, I would generally agree with the market's assessment of a situation, but not exclusively. Indeed, it IS possible to understand the situation better than most participants if one understands alll the legal, regulatory,and other aspects. I do agree this deal ain't happening September 7th. But, I make my living understanding things better than most market participants. Unfortunately, here, I have come to the dance too late.

Back to A Pismo's second post: "If someone as naive as you can make money, anyone can..."
I've grossed over $ 5 million trading risk arb in 7 years, so I think your judgment is being clouded by your rush to refute my comments about Bush, which, indeed, is all you have attempted that even speaks to an accurate assessment of me.

As to your third post, it's just selected drivel. It includes the statement "...ranging from the irrational to the psychotic..."
Of course this excludes even the minute possiblity that anyone blaming Bush is ever .0000001 % correct. At a minimum they are "irrational." You are saying their comments can ONLY be somewhere between irrational and psychotic. I can only suggest you look up "ad hominem " in the dictionary. You are simply wrong in not ascribing any blame to the President. Further, you have leaped to the conclusion that anyone criticizing him is a liberal. Piz, I don't think the clouds are surrounding MY judgment, only my net equity.

I read a few more of your selected dateline comments, and I can only conclude you must think that Bill Clinton is still in office.
You need to face the fact that my criticism of Bush is no more or no less than what it would be of any other sitting President in such a sitaution.

I want to say that I do not know if the deal will close (old terms, new terms) or it will be terminated.

I just want to emphasize that there is too much uncertainty (that is why the spread is so out of whack) and that the market's pricing is telling us that the deal will probably not be closed on September 7 (under the original terms).
 
freehouse, buddy, some times you have to know when to fold 'em.

Unfortunately, I'm "folding them" too late.

I , like Jerry Rice, have been prepared for retirement for quite some time. In fact, I discussed retirement with Rice at the Superbowl two years ago in Houston. He told me once you're financially prepared, you can be a better player.

In case you are wondering, I didn't know Rice.I was sitting on the 50 yard line (not on the actual line, but in a seat aligned with it) and happened to run into Rice and his family both outside the stadium and inside when his kids--maybe they were nieces and nephews--were sitting next to me . He was a few seats down.
We were joking about a guy three rows down from us wearing sunglasses who was standing up facing away from the field the entire game and rocking out to some unknown beat. The dude appeared to be x-ing.

In any case, i can probably live on a lot less than Jerry Rice.
 
Quote from stock777:

You realize a merger can fail and the spread go badly against you right?

If you are on some ridiculous 10% margin, you could get smoked.

Well, thats why you diversify across a number of MA spreads at once. I spent two years trading MA for a hedge fund in Los Angeles. We typically, each trader, had on at least 6 or 7 deals going at once. Out of the 100s of deals I traded, I think only one went bad overnight, resulting in some quick risk management. I am trying to remember which one that was, I think a VLO merger or COC..something like that. Anyway, its the same thing as if you have a bunch of outright positions, and one gaps against you a real big amount.

Of course, the more you have on, the more it sucks in an MA spread when it busts, and both sides are going against you, which is generally the case if you have put on the spread when the deal is announced, and are making money the whole way down to zero.

And, most pro firms use much much more than 10% margins for trading MA spreads. You simply don't make much off of your capital with these setups, so you need quite a bit to make money. That being said, each deal is realtively low risk.

Now, there are ways to do it both overnight and intraday. The lazy way is to put a bunch on when the deal is announced and hope it goes to zero. In this case you just sit on it and have lots of overnight risk. The second way is to day trade the ranges that these spreads typically trade in. Its commission intensive, and, thanks to the quants, the manual trader these days probably finds it difficult to eek out a living simply trading the daily ranges.

In the day trade scenario, its nice to be flat at the end of the day, but if you have to carry overnight, leave yourself open to as little risk (position size) as possible.

Having said that, I have developed numerous others strategies to trade these MA deals that have little to do with the above simple strategies. It seemed that, by the end of the MA fund's life, at least the day trading range-based strategy was working less and less well, and it was time to find better edges.
 
Back
Top