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?