Merger Arbitrage

Kirchner, who managed a merger arbitrage fund, wrote a practitioner text on the strategy of buying the shares of announced acquisition targets to capture the spread between the market price and the offer price.

The analytical content concerns what determines whether a deal closes. Kirchner works through the deal documents systematically: the merger agreement's conditions precedent, material adverse change clauses and how courts have interpreted them, financing conditions and their absence in strategic deals, break fees and reverse break fees, go-shop and no-shop provisions, and the treatment of shareholder approval and regulatory approval. He covers the specific regulatory processes including antitrust review under Hart-Scott-Rodino, second requests, foreign competition authorities and the national security review process, since these are the most common sources of failure in large transactions.

The strategy sections cover spread calculation and annualised return given expected closing dates, position sizing given that the loss on a broken deal is many times the gain on a completed one, the different structures including cash deals, stock deals requiring a short of the acquirer, collars and contingent value rights, and the treatment of competing bids, which are the source of the strategy's positive skew.

His risk framing is the useful part: the return distribution is a series of small gains punctuated by occasional large losses, so the strategy's performance in aggregate looks stable until it does not, and correlation with equity markets rises sharply in a crisis when deals break together.

The book is technical and United States focused. Deal practice has changed since 2009, particularly around reverse termination fees, specific performance provisions and the litigation over material adverse change clauses, notably the Akorn decision. Antitrust enforcement posture has also shifted substantially, which changes the base rates the strategy depends on.