Merger Masters by Kate Welling

Author:Kate Welling
Language: eng
Format: epub
Tags: BUS036000, Business & Economics/Investments & Securities/General, BUS041000, Business & Economics/Management
Publisher: Columbia University Press
Published: 2018-11-05T16:00:00+00:00

Beware of Safe Spreads

What Dinan is comfortable with, it turns out, aren’t safe-spread deals. “I always worry, ‘It’s 20 down and 50 cents up.’ That’s LTCM, not a lot of fun.” Instead, he prefers situations where “there are a couple of bucks down, but there’s a lot of money up. I have no idea what the probabilities are. But I’ve often found the best ones were where you didn’t really know what the values are. In the high-tech world, in biotech, oftentimes you’re surprised by the upside—but you had a floor.” Dinan pointed during our early May interview, as an example, to the takeover speculation then-swirling around biotech firm Medivation, a specialist in immunology with a promising portfolio of cancer drugs. He began narrating the story: “Sanofi made a hostile bid at $52.50—probably a low bid. The stock is averaging $62 now. We had bought it because it was rumored in the papers to be in play. Then Sanofi approached—Medivation stock opened around $55—and we bought a bunch more. I read the corporate governance documents first. Is there a path to control? It’s a Delaware corporation.

God bless Delaware—Joe Biden country—love Delaware. Stay away from Ohio. Never, ever, do a deal in Ohio. Bad things happen there. Ohio statutes are the worst. Maryland—dangerous. Stay out of Spiro Agnew country. You’ve got to learn. But back to Medivation. I don’t know what it is going to go for. It could go for $80. But I do know that I have a $52.50 hard stop on the downside, and the French usually have a couple of extra bucks in their pockets to get something done. Sanofi has a good reputation as a buyer. It’s the kind of situation I like. My kind of libido.” As it turned out, Sanofi dropped out of the bidding for Medivation when Pfizer entered into the hunt, and the American drug giant ended up winning its prize in August 2016 with a bid even higher than Dinan’s estimate—$81.50 a share, or $14 billion.

“There’s a famous scene in Harry Potter,” says Dinan. “There’s an old sorcerer’s hat, called the sorting hat. Harry is told that ‘the hat chooses you.’ Well, to some extent, I think the investors choose you.” What he’s getting at, Dinan explains, is that “the investors who come to us are oftentimes very different from those who might go to a plain vanilla merger-arbitrage fund. They are looking for higher returns, greater complexity. They not only want it and appreciate it—they’re a lot more understanding if it doesn’t always work. As a result, we get away with taking more risk. But we will also be penalized more if we de-risk and play it safe. So yes, when we have a tough six or nine months, we do hear, ‘you suck’ from some people. But we also have a lot of big, long-time investors whose message is, ‘we want up-capture. We don’t want you neutered. Forget belts and suspenders, we want a creative manager who will take risk.

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