March 30, 2007

Takeover Arbitrageur

by PG
New Disney Ride Simulates Disney–ABC Merger

The Onion

New Disney Ride Simulates Disney–ABC Merger

ORLANDO, FL—"The [boardroom] shake-up was really scary, but I still want to go again!" said 9-year-old Maddie Dahm who admitted she felt a little sick during the arbitrage part.

Jacob Weisberg asserts that "Michael Milken was not a 'takeover arbitrageur,' whatever that is." (Unsurprisingly, the "whatever that is" is omitted from the Financial Times version of the article. FT, too brilliant for your ignorance...) Had Weisberg troubled himself to google the phrase, he would have discovered that takeover arbitrage is a type of arbitrage involving risk, as in simultaneously purchasing stock in a target company while shorting stock in its potential acquirer. This is risky because if the takeover fails, the arbitrageur is out a lot of money, but he can avoid that with the use of insider information that keeps him abreast of how an acquisition is proceeding. Prof. Smith says*,

Consider the central stock-parking counts to which Milken pled guilty. The government claimed that Milken had an arrangement with takeover arbitrageur Ivan Boesky in which Milken would hold stock for Boesky. This would have allowed Boesky, among other things, to avoid filing the "13D" forms required when a stockholder’s holdings reach 5 percent or more of a company’s outstanding shares. Boesky testified as part of his plea bargain that he did have such an arrangement with Milken.
Andrew Roberts therefore was somewhat imprecise in attributing the position of takeover arbitrageur to Milken rather than to Boesky, who probably was the most infamous of the 1980s takeover arbitrageurs, but the term does exist and Milken was closely tied to it. Given that Milken's and Boesky's schemes were difficult even for lawyers and economists to untangle, I'd give a historian trained in neither discipline a pass on that.

More rightly deserving of criticism is Roberts's choice of "Anglosphere" to describe the political alliance of certain former British colonies: "His own idiosyncratic definition of English-speaking countries, which includes New Zealand but not Bermuda, Canada but not Ireland, and Australia but not India or South Africa, explains the book's curious cross-cutting from London to Wellington to Washington to Canberra." Weisberg's mention of Bermuda is simply stupid, as it is still an overseas territory of the UK, not an independent nation. However, Ireland, India and South Africa are easily distinguished from Canada and Australia: the former worked like hell to throw the Brits out, and the latter are still singing "God Save the Queen." The former remain dominantly populated by people who were there before the Brits showed up; the latter have carried the White Englishman's Burden well. A historian ought to be able to make these distinctions. The United States, of course, straddles these categories (successfully killed off most of the natives, yes, but also kicked out George III in short order), and is a law unto itself.

* Smith's review of Daniel Fischel's Payback is worth reading in its entirety, especially for students who want a brief review of the last week of Coffee's Corporations class, as applied to real life. Those who rail against Democratic support for Eliot Spitzer in the face of his dubious prosecutions of Wall Street figures might want to recall Republican favorite Rudy Giuliani's history in this area.

It was bad luck for economic progress and prosperity, and for Milken, that Giuliani found in Milken a way to become mayor of New York, and that Milken's behavior, while perhaps not even technically criminal, was injudicious enough to make him vulnerable to such opportunistic prosecution. ...
[Fischel's] account of the prosecution of the Princeton/ Newport partnership, for example, is shocking. In that case, Giuliani bootstrapped some alleged technical tax-code violations, based on transactions a federal circuit court subsequently held to be legal, into a criminal RICO prosecution. In response to Giuliani's RICO excesses, the Department of Justice changed its RICO guidelines. All the convictions Giuliani got in the Princeton/ Newport matter were thrown out on appeal, except for a perjury count against a 24-year-old junior trader named Lisa Jones. Her blind loyalty to her firm, according to Fischel, was inspired by its having plucked her off the mean streets of Los Angeles.
Fischel is right to be outraged that even though Giuliani's prosecution of Princeton/ Newport turned out to be baseless, it still destroyed that billion-dollar firm. The investment business is based largely on trust and reputation. As soon as Princeton/ Newport was accused, it was through, innocent though it later proved to be. Fischel succeeds utterly in terrifying his readers with his convincing description of how easy it is for unscrupulous prosecutors to destroy innocent people and businesses, even those who can afford the best lawyers.
The review also includes the

QUOTE OF THE DAY: "Economics is called the dismal science for good reason. For most of its inhabitants, this world is a cruel place. A principal role of economists seems to be to explain why things cannot be better. Most appear to enjoy this work and to regard harsh economic realities much as personal injury lawyers regard severe injuries." -- Lynn M. LoPucki, The Unsecured Creditor's Bargain, 80 Va. L. Rev. 1887, 1888 (1994).

March 30, 2007 02:08 AM | TrackBack
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