Special opportunities investment can take many forms and involve a number of asset classes. They often arise from breaking news stories or rumours of news about to break. They may concern spinoffs, tender offers, mergers, acquisitions, bankruptcy, litigation, capital structure dislocations, shareholder activism, stock buybacks, spin-offs, mergers, acquisitions, business consolidations, liquidations, reorganizations, bankruptcies, recapitalizations, share buy-backs, hostile takeover-bids, changes in the benchmark or index composition, sale or purchase of assets, discrepancies in the value of share classes, agreements, legal dispute & any other event that might affect a company's short-term prospects.
So-called special opportunities are characterized by catalytic events, i.e., events that can drive the price towards a new value. Depending on the opportunities available on the market, fund managers dynamically allocate their capital across the different sub-strategies.
To this end, analysts carry out thorough research on the operating and financial profiles of companies. It is a subjective and creative task that relies on the analyst’s talent and calls for a great experience. All investment decisions rest on a bottom-up analysis, which puts the burden of emphasis on fundamental analysis and a good knowledge of industrial sectors.
Spin-Offs & Demergers
Spin-offs and demergers involve the transfer of some assets and liabilities of a company’s business division into a separate entity. As a consequence, the shareholders of the parent company receive shares in this new entity. And the combined value of shares, i.e., the shares in the parent company plus the spin-off unit, is greater than the earlier situation. This process is often called the unlocking of value.
Mergers And Acquisitions (M&A)
Companies frequently use acquisitions as a long-term strategy for growing a business. The merger and acquisition (M&A) activity is often the hallmark of a mature player in a mature industry that is looking for new growth. But lately, acquisitions have also been used as an incubation centre or to expand the company’s offerings. On a special opportunities front, these M&A deals can lead to some healthy and quick gains for investors who recognize these opportunities.
Literature
The origins of special opportunities investing lie with the theories first proposed by Maurece Schiller in his 1955 book: special opportunities in Stocks and Bonds. Special opportunities investor takes a position with a clear idea of how much profit they will make when the position is liquidated. There is no buy and hold and wait for the future in Schiller’s view. This is because investors are focusing on one aspect - a merger arbitrage for example - and look for the profit arising only from that part of the situation.
Apart from corporate action, which is the common denominator of all special opportunities, we can usually find the following identifying characteristics:
- Profits develop independently of the trend of the securities market.
- Risks are at a minimum (reflecting prior knowledge of anticipated profit).
- Corporate action is in the development stage.
- The securities (stocks, bonds) are undervalued.
- Information is available inviting comprehensive analysis.”
