Financial Times, February 21, 2018 article: "Hedge funds fight to save M&A arbitrage strategy | Challenging deal prices in court has become risky after latest ruling in Delaware" [More confusion about court theory meaning that "Warren Buffett wouldn’t be Warren Buffett"]

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More confusion about court theory meaning that "Warren Buffett wouldn’t be Warren Buffett"



Source: Financial Times, February 21, 2018 article


Hedge funds

Hedge funds fight to save M&A arbitrage strategy

Challenging deal prices in court has become risky after latest ruling in Delaware

A listing could enable Dell to tap into soaring public market valuations and potentially give it a currency to mount further deals © Reuters

Sujeet Indap

[FEBRUARY 21, 2018]


Hedge funds which use the US courts to wring higher prices for merger and acquisition deals are fighting to save the lucrative investment strategy, after a Delaware court ruling that threatens to shut it down.


Verition Partners, an investor in Aruba Networks, which was acquired by Hewlett- Packard in 2015, has asked a judge to reconsider a ruling last week that not only refused to raise the price of the deal but cut the payout to the hedge fund by 30 per cent.


The judge said that the efficient markets hypothesis suggests the fair price for a takeover target is the share price that prevailed in the run-up to the deal — not including the premium an acquirer agrees to pay, and without regard to any financial model that might suggest a higher fundamental value.


Matthew Giffuni, managing partner at Quadre Investments, another hedge fund that has mounted legal challenges to deals, said the strategy was in limbo until the efficient markets hypothesis ruling could be challenged in Delaware’s Supreme Court.


“We all know that private equity excels at finding large-cap stocks that are not priced correctly,” he said. “Warren Buffett wouldn’t be Warren Buffett if every large-cap stock were priced correctly.”


Mounting legal challenges to valuations after a deal has closed has become a significant niche for merger arbitrage hedge funds. These “appraisal” cases seek to profit by convincing judges in Delaware, where most US companies are incorporated, to give them a higher payout.


Billions of dollars flooded into the strategy after the Delaware Court of Chancery awarded big premiums to dissident shareholders in the 2014 buyouts of Dell and DFC Global, but the state’s supreme court later upheld the existing deal prices. In those rulings, the higher court also endorsed the use of the efficient markets hypothesis in some instances.


The latest surprise ruling introduces new and significant downside risk for challengers.


“After Dell and DFC, it appeared that in many appraisal actions, the lowest amount an arbitrageur would likely receive was the deal price. Aruba makes appraisal arbitrage even riskier,” said Ann Lipton, a law professor at Tulane University.


“The door is, however, not totally closed for dissenters who seek to profit from an appraisal action. They can argue that the market was not efficient, or that information was concealed from the market ... But the bar is very high now to get a price that meaningfully exceeds the deal price.”


“Appraisal is dying, if not dead,” one long-time investor in the strategy said.


Verition had argued that discounted cash flow models indicated Aruba’s fair value exceeded $30 per share, versus the $24.67 paid by HP. But Delaware vice-chancellor Travis Laster ruled that fair value was just $17.13 per share, the average price in the 30 trading days before news of the deal leaked.


The hedge fund this week formally asked the judge to reconsider, a move that could be followed by an appeal to the Delaware Supreme Court.


Copyright The Financial Times Limited 2018.




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