Event Driven / M&A Arb Interview Process - How to Prepare?
I am currently interviewing with a large hedge fund platform for an event driven role (non US market).
The team seeks an experienced professional (eg. 5+ years), and the role is expected to be nearly 100% M&A arb focused. My background is in banking and PE, with a special sits angle.
I’ve been following a number of relevant M&A arb deals in the past few years, and I’ve successfully invested (PA) in a number of corporate structure types, in multiple geographies, involving events, usually without a hard catalyst, but many of those became actual M&A deals.
My question is how to prepare for second and third round interviews? Also, another challenge is that this particular team only focuses on events and is avoiding fundamentals oriented investing and analysis.
- I am preparing a “pitch” for a very recent post-spin type value oriented situation, although it’s not M&A arb (so the team can’t / won’t invest in this), but it’s still an “event trade” in the local market, very topical, and I can go into detail.
- I’ve prepared a recent topical M&A arb case study, it was intended to be a pitch for the first round interview but the spread disappeared within 1-2 days after initial announcement, as it went definitive very quickly. But I can talk about this and what I thought pre definitive.
- I’ve been following announced deals every week, but this is a non-US location with much fewer deals, and the spread for M&A arb opportunities tends to disappear too quickly to be used as a pitch.
- It seems that I am missing something that is deeply technical and focused only on the nature of the event itself. Not sure how to find such a situation though.
- Any other thoughts about how to prepare would be appreciated.
Based on the WSO content and threads related to event-driven strategies and M&A arbitrage, here are several preparation strategies for your upcoming interviews:
Deep Dive into Event-Driven Strategies: Given your background in banking, PE, and special situations, leverage your experience but focus on refining your understanding of event-driven strategies, particularly M&A arbitrage. This involves understanding the nuances of deal structures, regulatory environments, and market reactions to deal announcements.
Technical Preparation: Since the role is nearly 100% M&A arb focused and avoids fundamentals-oriented investing, concentrate on technical aspects such as deal structure analysis, risk arbitrage, and scenario analysis. Be prepared to discuss how you evaluate the probability of deal closure, deal timelines, and how you would hedge positions.
Case Studies and Pitch Preparation: Your idea of preparing a pitch for a recent post-spin type value-oriented situation is good, but ensure you also have a strong M&A arb case study. Even if the spread disappeared quickly in your example, discussing your thought process pre-definitive announcement can showcase your analytical skills and how you assess risk/reward in fast-moving situations.
Stay Informed on Current and Past Deals: Continue following announced deals weekly. For the interview, prepare to discuss not just the deals themselves but also the broader market implications and how similar future events could be leveraged. Even if deals in the non-US location are fewer and spreads disappear quickly, your ability to analyze and discuss these situations will be valuable.
Technical Skills: Ensure your Excel and financial modeling skills are sharp, focusing on models relevant to event-driven investing and M&A arbitrage. Be ready to discuss how you've used these skills in your past roles and how they apply to analyzing event-driven opportunities.
Behavioral and Fit Questions: Prepare for behavioral questions that might explore your ability to work in a team focused solely on event-driven strategies. Highlight experiences where you've successfully navigated similar environments or dealt with high-pressure, fast-paced decision-making.
Research the Fund and Team: Understand the fund's past investments, strategy, and philosophy towards event-driven investing. Tailor your pitch and case studies to align with their approach, and be prepared to discuss why you're a good fit for their specific strategy and team dynamics.
Network: If possible, reach out to current or former employees of the hedge fund or similar roles in other organizations. Gaining insights into the specific challenges and expectations of the role can provide you with a competitive edge.
Remember, demonstrating a deep understanding of event-driven strategies, coupled with your ability to analyze and act on fast-moving M&A opportunities, will be key to succeeding in your interviews.
Sources: https://www.wallstreetoasis.com/forum/investment-banking/sa-interview-prep-techniques?customgpt=1, I work in event driven / arbitrage. Here are some career advice for you, Q&A: 3rd Year PE Associate ($10bn+ AUM, MBO/LBO, equity, mezz, distressed debt), https://www.wallstreetoasis.com/forum/investment-banking/non-target-to-bb-ib-sa?customgpt=1, Beginner Interview Prep Tips
Guessing that there are not many M&A arb seats?
What's the catalyst angle of the post-spin? If you're aware they don't like fundamentals, it sounds like they'll focus on that element of the pitch. For spin-offs, I remember one deal where the initial listing was too small so the float was too small for long-only's to invest. This was going to be addressed after the lock-up period expired, presenting a hard catalyst date.
Remainco is a mid-cap that has undergone a multi-year process of selling non-core businesses and non-core real estate. Recently it completed a spin-out of a cash burning sub, which marked the completion of the simplification exercise.
Free float of remainco is sub 20%, and the company is owned by two large shareholders, the (>50%) major shareholder is very large entity operating in the same industry, seeking int’l growth and diversification, the second large (~30%) shareholder is a legacy real estate focused group, which has been selling down its share in remainco over the last decade.
Catalyst is scenario A, the company’s valuation discount (vs int’l peers and its major shareholder) is reduced as a result of better fundamentals (roic, growth, etc) resulting from the simplification, which should become apparent in the next 12 months, and scenario B, the major shareholder is planning a secondary listing on the same exchange as remainco, and is likely to acquire remainco to clean up its corporate structure.
My argument is that the listed status of remainco is a distraction, and the major shareholder should not pursue a second listing without first acquiring the 15% float of remainco, which trades at a much lower multiple.
Upside is a circa 2.0x return, if I am right about catalyst B, and I would argue that the worst case is scenario A, which is a 1.3x return.
… seems sufficiently catalyst heavy, but it’s not like a complex cross border M&A arb situation with a big spread, and some elongated process, which might be ideal.
in what world is x-border complex reg review ideal? the labor + cost that goes into developing an informed view is insane, and it's still guess work on binary risk at the end of the day. your spinco thesis sounds interesting and shows you're thinking in the right areas (but i'm VERY skeptical of any idea presented as having no downside so flesh that out / think of why it coudl go lower...)
also know your audience. you think you're gonna have an edge talking to arb guys about why HES/CVX or US Steel is gonna close/break? be humble. if you're looking at those, would choose lower octane stuff tbh, or a wide-spread name where the ultimate q is actually straightforward (like market definition in CPRI/TPR --> you still won't have any edge, even tho returns are quite juicy)
interesting read thanks for sharing
When you say the "spread disappears" after a few days, this is sometimes because there is perceived optionality in a merger situation (i.e. price bump, counterbids), which has been topical in Europe and the UK in the last 6 months or so.
There are still some European situations with a healthy (ish) spread that you can pitch: Kindred / La Francaise Des Jeux (FDJ), Redwood / Barratt
What spread would be too low? Sub 10% IRR?
Completely depends on the fund. Some guys try for 1-2% over fed funds and investors are happy with that and want to lose money 1 in 20 years. Others want 10% over with more risk. These are also the guys that blow up on unsigned/rumors (CYTK and PARA might be recent instances here) and trying to play big reg risk deals with enormous downside (IRBT and CPRI recently)
I think you have done enough work to show you are competent and serious about prepping for the interviews.
Turn things around and ask them how they navigate the lack of deals and the quickly closing spreads. You will learn something new and it will show them you've done your homework.
Separate question, on this same topic of M&A arb.
Does anyone have thoughts about what would be the process to determine whether you should exercise dissent rights / appraisal rights?
For example, there was a recent buyout of a closely held asset by a PE fund. It was a NYSE listed ADR. The PE fund controlled of the board, multiple share classes giving them > 90% voting rights.
The valuation was meaningfully below comps in other geographies for similar assets, and this was a faster growing platform with lower debt versus any other similar asset. The filing also showed that they received offers at a premium to the final takeout price, and ultimately brought those bidders into the deal as co-investors.
Aside from valuation fundamentals, are there any obvious legal / process oriented factors to determine whether or not it makes sense to exercise appraisal / dissent rights?
There are a number of legal rights/tools outside of appraisal rights that may be relevant in this context, which all generally fall under the umbrella of "corporate governance" - in short, what are the laws about corporate decision-making. Gaining a working knowledge of those general principles will help with issue-spotting around deals. Appraisal is just asking a judge to do a valuation, and agree with you that the proposed deal price is too low. But there are other "process oriented factors" - to use your phrase - outside of appraisal. For example, if you've ever heard the phrase "fiduciary duty" - very distilled, there's a whole body of case law and state statutes which aim to prevent a majority shareholder from screwing over the minority.
The following details in the example you provide stick out to me as red flags: "PE fund controlled of the board, multiple share classes giving them > 90% voting rights. .... The filing also showed that they received offers at a premium to the final takeout price, and ultimately brought those bidders into the deal as co-investors." A board of directors does not always have to accept the highest bid, but you should look to see what their excuses are - e.g., a competing bid does not have financing, or would draw greater antitrust scrutiny. What strikes me as particularly problematic about this example is that the higher/other competing bidders were brought into the lower-priced deal as co-investors. That is just asking for a lawsuit challenging the deal on the ground that the PE fund which controlled the board violated their fiduciary duties to the minority holders, and by bringing in bidders as co-investors (arguably, even if not intended, as a way to get them to drop their competing bids) that raises other legal claims to bring against the board and PE fund (collusion, conspiracy, the bidders aided and abetted the PE fund in its breach of fiduciary duty).
Former arb here. As others have said, diff arbs look for diff trades. Some look for the super safe deals that trade at tight spreads that they can just lever to the gills into the close. Others are looking for wider spreads that have some antitrust hair (but still prob mid-teens IRRs). The crazy wide spreads (JBLU/SAVE, IRBT) honestly seemed to be populated more by arb tourists than the dedicated funds. On situations like that, there is actually probably more of a fundamental analysis angle as you prob need higher conviction on what your break price is. Given the regulatory enviro (particularly w/ DOJ/FTC) you are seeing more folks wait for litigation and then potentially getting invovled.
In terms of the interview process, I never had to "pitch" an arb situation but was given a case study on an up for sale. Sounds like you've been following the market can keeping track of recent deals. If spreads have collapsed, you could still talk about the deals. You could give an analysis on why its trading where it is: Is there an overbid or bumpitrage folks are playing for? Was the stock heavily shorted into the deal so short covering has caused the spread to trade tighter than it should? You obv won't have access to antitrust lawyers but maybe you think that the market is underestimating the time it will take to close which decays the IRR trade that folks might be playing for. You can pitch shorting the spread on the arb freakout.
pitch a short on the arb front. finding good shorts in a long biased strategy is a huge value add.
Agree here. Especially now with larger MM invovlment, arb spreads have gotten a lot more correlated, and not just in related deals w/ similar issues (eg two Pharma / Biotech mergers).
Any thoughts about how common it would be for an arb analyst to work on pre-announce situations?
Seems like a lot of deals in the geography that I am working in have significant closing risks post announce.
Meanwhile, there are plenty of deals rumored / soft-announced months or years ahead of the offer.
Is this a viable strategy? Is this common in platforms?
I wonder how this type of strategy would balance with a more systematic arb approach of levering up high probability deals.
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