Wednesday, May 20, 2009

I Always Chuckle at "Merger Arbitrage" Bettors. . . .

UPDATED: 05.21.09 @ 10 AM EDT -- It turns out that JP Morgan also rendered a "fairness opinion" (see page 64) -- to Merck, that the deal was fair, from a financial point of view, to Merck shareholders. Hmmmm. . . . so why would its hedge fund be looking to bang-down the price of Schering-Plough common shares? Wasn't it "fair" enough, already? I dunno.


UPDATED: 05.20.09 @ 11 AM EDT -- In an unexpected twist, it turns out that JP Morgan (yes, THAT JP Morgan!) is the ultimate parent affiliated entity of the Highbridge entities. $21 billion under management, at Highbridge -- and $7 billion committed to do the Merck merger financing -- on the banking side.

So -- the $64,000 question: Why is Highbridge holding puts (i.e., short) $4.7 million worth -- on Schering-Plough common stock, as of March 31, 2009? And what is the strike price on those puts?

Is this a bet against the reverse merger getting done -- at least, on these terms?

That's a pretty good question, right? I sure think so.


This morning, a few "web-only" investment "news" outlets are fairly-breathlessly covering the latest disclosures by one John Paulson, a hedge fund operator (under the rather predictable name Paulson & Company, Inc.), in his latest SEC Form 13-F, filed just yesterday. Apparently he has made a $180 million bet on the merger arbitrage play in Merck v. Schering-Plough. These bets usually involve going long on the target, and shorting the acquiror -- then waiting for the merger price, and the market price, to converge.

To be fair, he has made a much larger ($1.2 billion!) arbitrage bet on the Pfizer-Wyeth deal. And, also to be fair, he apparently has over $36 billion under management -- so the $180 million bet -- on a closing of the Merck-Schering-Plough deal is not terribly outsized, by his standards, especially relative to the mammoth bet he's made on Pfizer's deal closing (with Wyeth).

Alright -- that's the set-up -- now, my punch-line, here: there is always someone (or a bunch of someones!) on the other side of these trades. And apparently, one of those someones is Highbridge Capital Management, LLC, a New York-based fund.

As of December 31, 2008 (in a 13-F report filed February 17, 2009), Highbridge was long Schering-Plough, holding 365,605 shares or about $6,226,000 worth. Then came the March 9, 2009 reverse merger proposal.

Yesterday, Highbridge disclosed, in a SEC Form 13-F filing, for the quarter ended March 31, 2009, that it was shorting Schering-Plough. Highbridge held puts on 201,800 shares, or about $4,752,000 worth of short positions. Lest you think this is some small time operator, consider this:
. . . .A recent SEC Form D (PDF file) indicates that as of March 10, 2009, Highbridge Capital Corp., an affiliate of the above entity, had raised a little over $3 billion, from 507 private accredited investors ($3,039,160,963, actually) -- or about an average of $6 million from each investor -- of a planned aggregate $6 billion raise. So, the fund is a little over half-sold out. . . .

Now, far be it from me to guess, here, but with Schering-Plough's stock trading well-below what the merger consideration would imply, why would a sophisticated investor go short Schering-Plough? By the way, Highbridge was not long (or short) Merck during these periods.

I think Highbridge must think that the deal won't close on the present terms, or that Merck will continue to decline, driving down the price of the Schering-Plough part of the deal, with it.

To be fair, we'll never know at what strike price Highbridge shorted Schering-Plough.

Fascinating, though, no?


Anonymous said...

I thought the reputable investment houses thought 'shorting' was the reason the stock market was having such difficulties? Wasn't Frank over on Yahoo complaining about how you were causing the demise of S/P by shorting it?

Oh well, I guess gotta make a buck any which way you can~~~even if it against yourself.

Condor said...

Quite so, Anonymous.

I think the issue here is that JP Morgan will make massive fees, and fair spreads, if/when Merck borrows the $7 billion to fund the $10.50 in cash, for every Schering-Plough share -- on merger closing day.

Interestingly, Schering-Plough common is trading below what the present Merck offer would imply -- and still, JP Morgan's hedge fund is shorting -- betting it will go lower still.

That feels like a conflict of interest -- the hedge fund will make more money if the deal tanks -- and the bank will make more money if it goes through to closing.

Click the image in the above post to read about another, older JP Morgan Chase conflict of interests, involving Schering-Plough common stock.