16 Wall Street's 'Riverboat Gambler' By A.F. Ehrbar Tender <strong>of</strong>fers, takeover battles, and corporate mergers that may-or may not-succeed are the stuff <strong>of</strong> everyday life to Guy Wyser Pratte '62. He is one <strong>of</strong> the handful <strong>of</strong> Wall Street pr<strong>of</strong>essionals engaged in the heady business <strong>of</strong> risk arbitrage. His arcane pr<strong>of</strong>ession has made him a celebrity on the Streetand his company's biggest pr<strong>of</strong>itmaker.
For six years now, acquisition-minded chief executives have been making unfriendly tender <strong>of</strong>fers for reluctant merger candidates with unprecedented frequency. Takeover battles for companies like Babcock & Wilcox, Carborundum, Fairchild Camera, and Mostek have provided unaccustomed drama for the nation's ordinarily mundane business pages, and unexpected pr<strong>of</strong>its for investors lucky enough to own stock in target companies. They also have made an unlikely celebrity <strong>of</strong> Guy Wyser-Pratte, an executive vice president at the brokerage firm <strong>of</strong> Bache Halsey Stuart and a 1962 graduate <strong>of</strong> the <strong>University</strong> <strong>of</strong> <strong>Rochester</strong>. Wyser-Pratte is one <strong>of</strong> a handful <strong>of</strong> Wall Street pr<strong>of</strong>essionals who engage in what is known as risk arbitrage. As the word risk implies, this type <strong>of</strong> arbitrage is very different from the classic variety. Traditional arbitrageurs try to make small, essentially riskless pr<strong>of</strong>its by simultaneously buying and selling securities whose values are linked but whose prices are momentarily out <strong>of</strong> sync. Risk arbitrageurs, in contrast, are the riverboat gamblers <strong>of</strong> the stock market. They specialize in betting on whether planned mergers and takeovers will go through, chancing enormous losses for a shot at smaller, but very quick, pr<strong>of</strong>its. Acquirers always pay premiums for the companies they buy, but the market price doesn't usually rise all the way to the acquisition price as soon as a merger or tender <strong>of</strong>fer is announced. After all, the deal may fall apart. That's where Wyser-Pratte and his fellow arbitrageurs come in. If they think the odds are in their favor, they buy the stock at the higher, postannouncement price in hopes <strong>of</strong> reselling it to the acquirer at a still higher price. When he sizes things up correctly, Wyser-Pratte can reap pr<strong>of</strong>its for Bache <strong>of</strong> ten percent in as little as a month, and two or three percent overnight. But if he's wrong and a deal falls through, the stock may fall back to its preannouncement price or even lower, and he can drop thirty percent or more <strong>of</strong> what he puts up. Those formidable risks may explain why there are only six major players in the arbitrage game. Aside from Bache, they include Ivan Boesky, who runs his own firm, and the arbitrageurs at Salomon Brothers, Goldman Sachs, Bear Stearns, and Merrill Lynch, Pierce, Fenner & Smith. Their high rolling brought commensurately high returns during the heyday <strong>of</strong> the sixties, when conglomerates seemed to be buying up anything with a balance sheet. But those pr<strong>of</strong>its were merely a prelude to what was to come. Since 1974, arbitrageurs have been some <strong>of</strong> the biggest money makers in lower Manhattan. Wyser-Pratte, for instance, is the highest paid executive at Bache. As published in the firm's proxy statement, his compensation, which includes a portion <strong>of</strong> the arbitrage pr<strong>of</strong>its, came to $865,000 in fiscal 1978 and $1,374,000 in fiscal 1979. The arbitrage department, in turn, contributes significantly to Bache's earnings. Wyser-Pratte brings in his hefty contributions to the bottom line with a staff <strong>of</strong> only ten-himself, three other pr<strong>of</strong>essionals, and six secretaries and clerks. Arbitrage has been so wildly lucrative in recent years because <strong>of</strong> the proliferation <strong>of</strong> unfriendly takeovers. The initial spreads between market prices and acquisition prices usually are higher in tender <strong>of</strong>fers than they are in the friendly mergers that predominated during the sixties. The higher spreads give fast-acting arbitrageurs the chance to reap larger pr<strong>of</strong>its if they move in right after <strong>of</strong>fers are announced. In addition, many <strong>of</strong> the companies making tender <strong>of</strong>fers have come through with second, higher <strong>of</strong>fers to overcome the resistance <strong>of</strong> the target companies' managers. The most important change from the sixties, however, has been the entry <strong>of</strong> second companies, and sometimes even third and fourth companies, into the competition for many <strong>of</strong> the targets. The resulting bidding contests have turned some takeovers into genuine bonanzas for the arbitrageurs. Wyser-Pratte's biggest winner, the one that may have netted more than $4 million, was the bidding contest for Babcock & Wilcox. United Technologies started the action in Babcock in March 1977 with a tender <strong>of</strong>fer at $42 a share, $7 more than the market price. The arbitrageurs began buying at $40, the first trading price after the <strong>of</strong>fer, but their gamble began to look like a poor one as Babcock tied up United's <strong>of</strong>fer with suits in state and federal courts. The action picked up in May when J. Ray McDermott & Company announced that it had bought 9.9 percent <strong>of</strong> Babcock. With that the stock went to $44. The stock made another big move in early August when United, having cleared the legal hurdles, upped its <strong>of</strong>fer to $48. On August 14 McDermott responded with a $55 tender <strong>of</strong>fer. By then Wyser-Pratte's stake in Babc:ock came to about $15 million, the largest arbitrage position Bache had ever taken. In the midst <strong>of</strong> that frenzied activity, and with so much at risk, he went on vacation. He spent a week in Martha's Vineyard and a second one in Boothbay Harbor, Maine. The sojourn by the sea was interrupted almost hourly by frantic phone calls from New York. Top executives at Bache urged him to take the pr<strong>of</strong>its and run, but Wyser-Pratte held fast. The patience paid <strong>of</strong>f. A week after he returned to work, McDermott made the final, winning <strong>of</strong>fer-$65 a share. Wyser-Pratte won't say precisely how much he made on Babcock, but he admits to at least $15 a share. If the estimate <strong>of</strong> a $15 million investment is correct, he had around 300,000 shares at an average cost <strong>of</strong> about $50. A $15-a-share gain works out to a pr<strong>of</strong>it <strong>of</strong> $4.5 million. Tender <strong>of</strong>fers don't always produce large pr<strong>of</strong>its, <strong>of</strong> course. Wyser-Pratte and his compatriots take a drubbing whenever a target company successfully fends <strong>of</strong>f a would-be acquirer, and that has happened <strong>of</strong>ten enough to keep the fainthearted out <strong>of</strong> the arbitrage game. Gerber, for instance, beat back a takeover attempt by Anderson Clayton, Marshall Field stymied Carter 17
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