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As deals rise, bankers warn of ‘bumpitrage’

Mar 20, 2015

You probably don't know what a bumpitrage is. But top investment banker Greg Weinberger, who was named last week as the co-head of global mergers at Credit Suisse, says it's bad and it's growing.

And it's not just bumpitrage. There's also concern about "appraisal arbitrage," and of course "arbageddon," which Weinberger says was his favorite word of 2014.

Mergers, as you have probably read, are back. After a post-financial crisis drop and a few flat years, corporate combinations in pretty much every form, every industry, and every geography are up. Last year, globally the value of all corporate mergers hit $3.5 trillion, up 47% from the year before.

One side effect of this merger wave has been the hatching of buzzwords like bumpitrage. Weinberger thinks that the good times for deal makers will continue. He gave his upbeat assessment at the Tulane Corporate Law Institute, the annual gathering of top bankers and lawyers who steer companies through mergers.

Weinberger said that a rising stock market will likely give corporate boards more confidence. He even said the dramatic rise in the number of failed transactions in 2014, up 153%, suggests that M&A activity would continue. He said it showed executives are willing to pursue risky deals, and all those failed deals will probably cause spurned executives to go out and look for other partners. In addition, the market has reacted well to deals, bidding up the shares of companies involved in them. Lastly, activist investors, who often push for deals, have more money than ever. All that should translate into more deals.

That is, as Weinberger warns, unless we get hit with a wave of bumpitrage. Bumpitrage is when activist investors or others buy shares of companies that have recently agreed to be acquired and try to push for a higher price for the deals. Weinberger says bumpitrage is leading to acquirers initially offering less for companies out of fear of having to offer more later. He says target companies are rejecting these bids, scuttling deals. That's bad news for Weinberger and the other bankers and lawyers at the conference who make their money from M&A. He says nothing about what the fact that bumpitrage could be forcing companies to overpay for deals, which could hurt them or their shareholders down the road, which seems like the real concern.

Appraisal arbitrage is a close cousin to bumpitrage. That's when an investor, often a hedge fund, buys shares of a company after it has agreed to be acquired but before a deal has been completed. Those investors then try to use an appraisal to say that the acquired company should get a better price. Often, the disputes end in lawsuits. More hedge funds are raising money to bring appraisal suits and some of the lawyers at the conference, presumably the ones who defend companies, thought this was unfair and that there should be new rules against these suits.

But Delaware Supreme Court Chief Justice Leo Strine said such concerns were misplaced. He said most of these suits didn't go anywhere, and were mostly a waste of money, arguing that the rules shouldn't be changed just because some hedge funds have found some "suckers" to invest in this.

And what's "arbeggedon?" Well, that's really bad, I guess. But if the mood of this week's M&A conference is any guide, we won't have to worry about it anytime soon.

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