Swimming with the Sharks

If takeover artists play the role of sharks in the corporate sea, then risk arbitragers are the pilot fish who follow along and gobble up the stray morsels. What multimillion-dollar morsels these are, though. Arbitrage is the business of making profits from the price discrepancies that often turn up in financial markets. In takeover struggles, acquiring companies offer to pay more than the market price to ensure that stockholders will turn over their shares. When the so-called arbs see corporate raiders on the prowl, they buy blocks of the target firm's stock while the price is still low. They are betting that the deal will go through and that they will be able to sell the stock later at the higher price.

The arbs, however, can lose fortunes in an instant if a merger agreement falls apart. These dramatic wins and wipeouts have earned arbs a reputation as Wall Street's most daring investors. Says Daniel Tisch, an arb for Wall Street's Salomon Brothers: "You can't be 100% sane to sit here and, based on 20 words on the Dow Jones wire, risk $10 million to $15 million."

Just ten years ago, risk arbitrage was practiced only by a few high rollers. The merger boom, however, has provided so many opportunities that many other investors have become involved. By far the biggest and boldest of the arbs is Ivan F. Boesky, 47, who has his own privately held firm. He raked in about $50 million on Texaco's 1984 takeover of Getty and $65 million last year when Chevron bought Gulf. Three weeks ago, Boesky turned a tidy profit when he bought 3 million shares of Holiday Inns at $47.30 just as the company was offering to buy back its stock for $49.

Sometimes he is wrong. When Phillips Petroleum struck a deal to buy off the raiding T. Boone Pickens in December at a lower than expected price, the firm's stock plummeted and Boesky lost an estimated $40 million in less than a week. Nonetheless, he maintains that he is correct 90% of the time. "This is not some kind of gambling exercise," he says. "It's a very serious business." Boesky contends that arbitrage can be safer than buying stocks as long-term investments. Reason: he maintains it is simpler to calculate the odds of one deal's success than to figure out the movements of the stock market.

Since the only raw materials for arbitrage are money and information, Boesky makes research his obsession. While standing and pacing behind his desk, he watches traders on two video screens and works a 160-line telephone console to keep in touch with 100 employees and hundreds of tipsters. Before plunging into a stock, he commissions his lawyers to analyze the situation for legal and legislative roadblocks.

Critics of arbitragers claim they make money for themselves but produce nothing of value for the economy. While long-term stock investments help companies grow by providing them with capital, Boesky's purchases are short- term and opportunistic. Yet he points out that arbitragers help the stock market function smoothly because they are often willing to buy a particular stock when everyone else is selling in a panic. What Boesky does has also provided him with a personal fortune estimated at more than $150 million.