invest in one or the other, not both. Even if they can buy both stocks and bonds, it's incredibly unlikely that, out of all the available choices of bond investments, the new Top- pings bonds are going to head up the list. So, in the end, practically everyone who receives merger securities, whether unsophisticated individual or sophisticated institu- tion, is on the same page—everyone just wants out. It should come as no surpise, then, that this is where you come in. Not unlike (in fact, incredibly similar to) the dy- namics of a spinoff situation, the indiscriminate selling of merger securities, more often than not, creates a huge buy- ing opportunity. Both spinoffs and merger securities are dis- tributed to investors who were originally investing in something entirely different. Both spinoffs and merger secu- rities are generally unwanted by those investors who receive them. Both spinoffs and merger securities are usually sold without regard to the investment merits. As a result, both I K .
YOU CAN BE A STOCK M A R K E T G E N I U S spinoffs and merger securities (surprise, surprise) can make you a lot of money. Hopefully, by now you're starting to be- lieve me, but just in case, let's try a few real-world examples. C A S E S T U D Y ©> 4? ^ SUPER RITE FOODS Did you ever want to be a big-time financier? Think you need a lot of money? Well, here's a situation where looking at merger securities turned bus fare into a ride with the big boys. The good news is that the opportunity was spelled out in readily available merger documents—only, as usual, al- most no one bothered to look. In January 1989, an investor group led by the chairman of Super Rite Foods made an offer to purchase the shares of Super Rite, a grocery chain, for $18 in cash and $5 in face amount of a newly issued preferred stock that paid dividends of seventy-five cents annually (effectively 15 percent of its face value each year). A transaction of this type, where man- agement insiders seek to purchase all shares held by the public, is generally referred to as a going-private transaction. Going-private transactions are particularly interesting be- cause these are situations where the insiders, having de- cided to purchase the entire equity interest in the company, arc indicating a strong conviction regarding the company's future. When available, ihc opportunity to participate in
JOEL G R E E N B L A T T this type of transaction through the purchase of merger se- curities is often worth a close look. In this case, as reported in the newspapers, 47 percent of Super Rite was actually owned by Rite Aid Corp, the opera- tor of a large chain of drug stores. Alex Grass, the chairman of Super Rite and the leader of the management group, also happened to be the Chairman of Rite Aid. According to Mr. Grass, since Rite Aid's board of directors was set on "liqui- dating its stake in Super Rite," he and his management group were interested in buying it along with the rest of the company. The management group planned to accomplish this by pursuing a leveraged buyout transaction. This is a
- Fall '19
- Amy Greenblatt