January 22, 2018

Appraisal: Game Over for Hedge Fund Appraisal Arbitrage?

It’s not really a stretch to say that 2017 was a crappy year for appraisal arbitrage funds. After getting clobbered more than once in the Delaware Chancery Court, arbs took two big hits in the Delaware Supreme Court – first with the DFC Global decision, and then with Dell Computer.

In light of the ruling in Dell and other 2017 cases, this FT article says that some are suggesting it’s “game over” for appraisal funds:

That ruling and similar ones in recent months are forcing appraisal-focused hedge funds to revisit their approach. One long-time investor in this area told the Financial Times that the Dell reversal means “game over” for the strategy. He said that the initial Dell victory in 2016, among others, had made it too easy to raise money for the strategy and that many funding sources would now pull the plug.

The article says that other investors continue to believe that appraisal arbitrage is a viable strategy – but that funds must be more selective about their targets.  My own guess is that this view is probably right.  To me, the potentially greater long-term threat to appraisal arbitrage isn’t Delaware’s renewed emphasis on deal price, but improvements to corporate recordkeeping made possible through the use of blockchain technology.

John Jenkins