2001 · Pabrai Investment Funds (via Internet Archive)
Letter to Partners (Apr 2001)
from them in the 1950s and 60s Buffett Partnerships. Buffett continues to invest in workouts for his own account as well as Berkshire Hathaway. Another terms for workouts would be Arbitrage or simply “Special Situations” Buffett does two types of investing. One is buying great companies at compelling valuations and holding them for a long time (Coca Cola, American Express etc.) The other is workout investing. He has made a lot of money in his career for these workouts. Workouts typically offer modest returns, but virtually no risk. Let me give you some examples: Company A is publicly traded and its stock is at $30/share. Company A announces that it has reached an agreement to be sold to Company B in an all-cash transaction for $35/share. They announce that the both the boards have approved the transaction and recommended that shareholders approve it as well. A month later, the shareholders have approved the merger and the deal is expected to close in 30-45 days. Company A’s stock is trading in a range of $34-$34.50/share. The NASDAQ drops 10% a month before the merger and the stock drops to $33.50/share. If one bought the stock at $33.50 and got $35 a month later, it’s a 53.73% annualized rate of return with virtually no risk! This is known as “Merger Arbitrage”. Usually spreads on announced cash mergers are slim, but occasionally these spreads widen. They are sometimes quite wide if the companies are small cap as liquidity issues keep big players out.