Special Situation Investing
Hedging, arbitrage and liquidations as a combined discipline.
Summary
The reference has not verified this book in detail; the summary states only what the title, author and subject establish.
Brian Stark wrote this practitioner treatment of special situation investing, meaning positions whose outcome depends on a specific corporate event rather than on general market movement or on business performance.
The situations covered include risk arbitrage in announced mergers, where the position is the spread between the market price and the deal terms; tender offers and the mechanics of proration when an offer is oversubscribed; corporate liquidations, where the analysis is of asset realisation and timing; recapitalisations and exchange offers; rights offerings; spin-offs; and securities of companies in bankruptcy. For each, Stark sets out the mechanics, the sources of return, and the specific risks, principally that the event does not occur or occurs on different terms.
The reference has not verified this book in detail beyond its subject matter, and this entry describes the field rather than the author's particular arguments. Readers should note that it dates from 1983 and that merger arbitrage spreads, deal protection mechanisms, bankruptcy practice and the regulatory framework for tender offers have all changed substantially since. Later treatments including Joel Greenblatt's work cover overlapping ground.
Key takeaways 6
- Special situation returns depend on a specific corporate event occurring rather than on market direction or business performance.
- Merger arbitrage returns are the spread between market price and deal terms, which compensates for the probability the deal fails.
- Deal failure risk is not diversifiable in the usual way, because deals fail in clusters when financing markets close.
- Proration in oversubscribed tender offers determines the actual return, so the analysis must estimate participation rates.
- Liquidation analysis depends on the timing of asset realisation as much as on the estimated proceeds.
- Securities of companies in bankruptcy are priced by process expectations rather than by asset values alone.
Who should read it
Event-driven investors wanting a survey of special situation types and their mechanics, with the caveat that this entry is not verified in detail and the book is dated.
Where it sits in the reference 2
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