Book review: “Merger Masters – Tales of Arbitrage”

Merger Masters, written by Kate Welling and supported by Mario Gabelli is a book similar to Jack Schwagers “Market Wizards” series, portraying some famous investors.

In this case the focus is on investors who are active mostly in the Merger Arbitrage Business, Some guys are very well known like John Paulson, Paul Singer or guy Wyser-Pratte but from other guys, who keep a low profile, most invetsors might have never heard of.

Personally I wish this book would have been written long ago and that I head read it long ago. It really offeres a very comprehensive view into this relatively arcane world of arbitrage investing with some very suprising insights.

It is also clear that there is not ONE recipe to be successful as an Arb. For instance the question on when to sell when a deal breaks divides these guys into two groups: Some of them say the only way is to sell directly after the news whereas others say that you should never sell directly but wait for a better price. Other notable differences are levels of concentration, use of leverage and if hostile deals are part of the universe or not.

I was also surprised on the depth of fundamental analysis that most of these guys seem to be doing before entering into a deal, at least they claim to do so.

What makes the book really special and even better than the Market Wizard series is the fact that there is also space for the “other side”, CEOs who have fought the Arbs in hostile deals an ultimately won. Most interesting was the story about the take over attempt of Airgas by Air Products which is described in very good detail and how Airgas Managment ultimately won although the odds were highly against them.

The content is clearly US centric, however I think most of the mentioned rules etc. can be applied internationally.

Summary:

Overall, the book is extremely well written and offers a unique deep insight into the M&A arbitrage world. There is a lot of content in the book and I think I have to read it at least a second time to digest all of it.

Overall I can recommend the book highly to any investor, because sooner or later one will be involved in such a situation. For “special situation” investors this book is a MUST. For me clearly one of the best investment books that I have ever read.

11 comments

  • Finally had a chance to read the book, agree with most of the points in your post, but found the book pretty repetitive

  • The main takeway from this book for me was how common trading on inside information was. Many of the heavyweights mentioned allude to it and some even explicitly mention trading on it. Something to think about (along with the level of interest rates) when we judge their track records.

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  • What about the MAN SE buyout? It trades below 60 when VW offered above 90 per share. The plan is to buyout minorities and merge it with Scania to form and list Treton. Apparently around 95% of shareholders accepted, which means they can squeeze-out the rest of the minority shareholders.

    Do you have an opinion on this?

    • MAN is already part of Traton; judging by the valuation of Traton, and the MAN share thereof turnover and p/l wise, MAN should trade way lower, south of 50. Traton will probably let the shareprice dwindle towards 50, and then squeeze out on the required squeeze-out price, being somewhere around the 3 month average, my guess some 50 euro or so. VW/Traton have no other obligations towards MAN anymore.

      • There is still a chance that VW will leave the MAN-share listed for a long time as they do with Audi.

        For Audi I have heard several times that AudiManagers likes the share as it is cheap promotion for the brand of Audi. The financial reports of a listed company regularly offer a cheap to free of charge coverage in the News.

        • Thanks a lot, eddie and Roger.

          I ended up investing in Traton at 4x EBIT: 12.7 market cap – 1.7 net cash (before capitalized leases) – 0.4 investment in Navistar – 0.9 investment in Sinotruk – 0.8 equity at financial services (1x book for a 20% ROE) = 8.8bn EV / 2.2 EBIT for 2019. It’s 5x EBIT if you account for full pension liabilities.

          There’s upside to that too: trucks are fully renovated every 20 years or so; Scania ends its last renovation in 2019, while man in 2021. This means they have extra costs now from launching a new generation and from manufacturing both the new and the old generation during the ramp up. Plus R&D costs should go down a bit while average selling prices go up. This time, renovating both brands at the same time has one extremely important implication -> they have being designed to use the same platform. While MAN is not a very good business, Scania is as good as a truck manufacturer can get: 24% pretax returns on capital employed since 1994 (more than twice those of Volvo or Daimler), with lows in the low teens and highs in the 50s.

          Sector fundamentals are quite solid, where the three biggest players have 80-90% market share in a region and products are treated as capital goods -> TCO is highly valued by an informed buyer -> where Scania gets its premium. There’s huge potential to the higher margin aftermarket business, where Scania is fully leveraging its R&D. On the downside, European truck sales are at a new max (they have no exposure to NA).

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  • Many thanks.
    Will read it with great interest (as every single of your analysis for which I am most grateful).

  • Thanks for the summary. Another timely review of the same book here:
    http://mastersinvest.com/newblog/2019/5/11/merger-masters-the-art-of-risk-arb
    Does it push you to do more work on those opportunities?

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