The Wall Street Journal: Arbitragers Sing a Sad Song

Bettors on Mergers Having a Tough Year, And It's Not Looking Up

By HEIDI N. MOORE
August 5, 2008

Last Wednesday, on a steamy summer evening in New York City, about 40 merger arbitragers gathered together for a well-earned drink.

The arbs, who bet on the stock prices of companies involved in mergers, had been pummeled by the year's failed takeovers, such as the scuttled $6.4 billion buyout of Alliance Data Systems and the $6.1 billion buyout of Penn National Gaming. Several other deals closed only after months of falling prices: Sirius Satellite Radio-XM Satellite Radio Holdings and the $18 billion buyout of Clear Channel Communications.

Gathered together on the rooftop bar at 230 Fifth Ave. with colleagues from 15 or so other hedge funds, one arb looked down to the street and sighed, "It's a good thing the Clear Channel buyout closed today. Now nobody has to jump."

Gallows humor, sure, but it contains a kernel of truth. Several hedge funds have reduced or closed their merger-arb desks this year; the previously cushy business of betting on mergers and acquisitions, once touted as nearly riskless, has been pitted with treacherous falls this year.

There could be more to come. There are some old deals kicking around, such as Hexion Specialty Chemical's $6.5 billion takeover of Huntsman; both sides are in litigation. Then there a batch of new deals cropping up with plenty of controversy and fears of rival bidders. Some arbs are betting a new bidder will disrupt Cleveland-Cliff's $10 billion offer for metallurgical coal miner Alpha Natural Resources; top shareholder Phil Falcone of Harbinger Capital Management already has expressed his disapproval of the deal price. Republic Services's $6.24 billion bid for Allied Waste Industries is challenged by rival Waste Management, which wants to buy Republic. And while rival bidders haven't emerged, Carl Icahn's official rejection Monday of Bristol-Myers Squibb's $4.5 billion offer for the rest of ImClone could spur other pharmaceutical companies to jump into the fray.

All of which makes for another reason that none of those arbs leapt to the street below. The steep drops, everyone knows, will come on their own.ImClone's Worth To Bristol-Myers

Is ImClone really worth $10 less a share than it commanded in 2001?

Seven years ago, Bristol-Myers Squibb paid $70 a share for its stake in ImClone. Last week, Bristol-Myers offered to buy the remaining 73% of ImClone for $60 a share.

Bristol-Myers has always seemed to cast a skeptical eye on ImClone. In 2001, when the New York drug maker agreed to buy 14.4 million ImClone shares at $70 each, it expressly decided not to buy a majority stake -- an idea ImClone pushed but that Bristol-Myers's board rejected.

Analyst estimates on ImClone's valuation are all over the map, but they agree on one thing: Bristol-Myers should raise its offer. Analyst Howard Liang at Leerink Swann put a $67-a-share price on ImClone. Michael G. King at Rodman & Renshaw's sum-of-the-parts analysis suggests $71 a share. Katherine Kim at Banc of America Securities: $62. Mr. Icahn says the offer undervalues ImClone.

Mr. King also noted that the bid's 29% premium looks paltry when compared with the roughly 48% premium in comparable deals for oncology companies. That would indicate a value for ImClone of $65 to $70 a share. Other acquisitions of mid-cap pharmaceutical companies were done at an average premium of 45%.

Bristol-Myers, of course, is in something of a bind. Naturally, it wants to acquire ImClone cheaply. But if it refuses to raise the offer, the company may as well admit it overpaid for those ImClone shares seven years ago.