I don't think this is going to be the last time that a potential private equity deal is pulled, much to the disappointment of arbs. As I've been covering on BloggingBuyouts, I think the credit situation in the United States is quickly turning sour. Many professionals in the fixed income space who I talk to constantly talk about not being paid enough interest to justify the risks that they are taking. As a result, I believe private equity firms are going to have much more trouble in borrowing the money they need to continue their leveraged buyouts. I think arbs are going to face more pain in the future.
The only kind of arbitrage that I'd play is what I call "activist arbitrage." This is when an activist believes a buyout price is too low and has stated he is going to vote against the deal. A good example of this is the current situation in Inter-Tel Inc. (NASDAQ: INTL). Currently, the stock is trading for $24.46, while there is a buyout proposal for $25.60 on the table. Activist investor Steven Mihaylo is against the buyout and believes the company is worth significantly more (approximately $28 per share), if it would just perform a recapitalization. Because the company is being adamant about the recap, Mihaylo is now making demands. It is not only Mihaylo who is against this deal; in fact Millennium Management has also come out against the deal and in favor of Mihaylo's recap plan.
I like the situation because worst case, if the deal goes through, investors still profit more than $1 per share. If the deal falls through and the recap is approved, investors stand to make almost $4 per share.
