Merger Masters

Merger Masters is a collection of 17 portraits of investors doing merger arbitrage, and three portraits of CEOs involved in mergers. All based on interviews with the respective people.

I found Merger Masters an interesting read, giving me a small glimpse into how professional arbitrageurs work. Over time it becomes a bit repetitive, though, as most of the covered investors use a similar approach. What I didn't understand is the purpose of the more than 100 examples of merger arbitrage in the appendix.

My notes

Introduction

If a management participates in a buyout group, you know they have hidden jewels.

[...] change breeds opportunities.

The Arbs' Perspectives

Guy Wyser-Pratte

When he started in the business, Wyser-Pratte points out, "risk arbs wouldn't go into a deal if there wasn't an unlevered 35 percent - 40 percent return" on offer. "You sweated even those deals, because the Justice Department could come in at the last minute and drive everybody nuts. I just hated being subject to someone else's whims, so I started to look for ways to push the values myself." Thus, the more dumb money flowed into the risk-arb space amid the merger mania of the 1980s, the more diligently Wyser-Pratte focused on creating an activist business.

Traditional risk arbitrageurs, he explains, use their capacity for risk-bearing and expertise in corporate valuation to take positions in corporate transactions that appear sufficiently rewarding – thereby providing liquidity that helps ensure efficient outcomes. Activist arbs use the those same skills and resources to take the process one step further. They recognize situations where inept managements have created "value gaps" and where they can employ their capital to catalyze change.

The former marine evolved an approach to activist arbitrage resembling a military campaign. Not every charge succeeded on its own, but taken together, his unrelenting attacks helped plant the idea – among shareholders, professional investors, lawyers, and the financial media – that the interests of shareholders could not simply be swept under the rug.

"Every time I'd catch some skullduggery going on, on the part of a corporate board, at the expense of shareholders, I really was energized to go after them."

"I'm not a passive person, and just sitting anywhere, passively sweating out individual risk-arb deals – I couldn't deal with it any longer. So I started to go after managements in the United States that were not doing right by their shareholders."

[...] Wyser-Pratte's investment modus operandi always starts with identifying undervalued securities and analyzing what problems in management, strategy, asset mix, corporate governance, shareholder conflicts, or any of a host of global or local forces are weighing on the stock. Wyser-Pratte then uses peer-group analysis and related financial statistics to estimate what the company might be worth without those burdens – and calculates his activist-arbitrage "spread" as the distance between that estimate and the company's current market price (as opposed to the difference between a takeover premium and the actual market price in more traditional risk arbitrage, centered on announced transactions). This "value gap" represents the potential return that might be gained for shareholders by agitating for the desired changes.

Jeffrey Tarr

Jeff Tarr [...] is one of those lucky guys blessed with a combination of brains and the ability to recognize when he was in the right place at the right time – along with the calculating wile and gambling instincts required to take advantage of favorable odds.

[...] a New York acquaintance suggested Tarr might like working in risk arbitrage. "I thought he meant arbitrating disputes between two people", remembers Tarr.

"He says to me, 'Well, if you check out, you can run the whole arb department.' I was only twenty-three. I didn't have any money. They offered me the opportunity to make eight times what Goldman had offered." Naturally, Tarr accepted the Smith Barney offer and began a crash course in risk arbitrage and the ways of Wall Street.

In the partnership's early years, Tarr recalls, "I made it a project – I wanted to see if I could not pay any taxes. [...] I could always figure out these things that I thought were wrong in the tax code – but as long as the loopholes were legal, we'd use them. It was fun to figure out. But we didn't talk about them because if we did everyone would have been doing them – or the government would have fixed the loopholes."

"[...] unusual things happen. That's why you have to diversify."

Martin Gruss

"I remember in the early 1970s, there'd be a bid for a company at $25 a share. Most risk arbs would get together and give their orders to one broker – and the stock would open at $23. Everybody made a very nice living off of that. Nowadays, if there's a bid at $25, the stock opens at $27. There's no spread. People have wised up to the hope of a competitive deal."

"There's no such thing as a 'sure thing' and deals can break for a whole host of reasons – which really can't be foreseen. What's more, my experiences also taught me that the insiders very often don't know how it will turn out. Deals get done by human beings, and humans can be fickle. Attitudes can turn on a dime. So much so that maybe a degree in psychology would be good preparation for merger arbitrage."

Paul Singer

Singer is crystal clear on the principle that has guided his career. "I don't want to lose money, ever, with no excuses. My goal with investors is a combination of underpromising and overdelivering whenever I can. And I try not to be benchmarked. We just try to make a moderate return – as high as possible – given that our goal is not to lose money."

Finance didn't even enter his thoughts, Singer says, until after he was admitted to Harvard Law and his proud and excited father told him, "You have to learn how to invest". [...] Singer continues, "So he and I started trading stocks together. I was so 'clever' that I was shorting and buying on margin and trading at the same time I was reading about investing. I was the kind of person who went to the library and took out all the books on investing." [...] Yet all of Singer's reading wasn't getting him very far. "Basically, my dad and I found every conceivable way to lose money, on the long side, the short side. It was pathetic. But what that engendered was a deep desire to figure it out."

The core lesson Singer took from his market experiences in the 1960s and 1970s, he says, "was to try as much as possible to control my own destiny. If I had to broad brush it, I'd say there's one thing I'm never going to get out of my head: I don't know enough – and neither does any guru" about the direction of the markets.

"I actually think the technical skills are secondary. The important stuff is creativity and a little intelligence. You have to be good at numbers and have the ability to analyze. [...] As an investor, you need tenacity, resilience. Everybody makes mistakes – sometimes big – and you have to have resilience to come back, survive, make decisions amid ambiguity."

"We've been trading mergers, in one way or another, for thirty-five years. I became interested not as a continuous player but in the occasional merger deal and came to feel [...] that creating value, making something happen, was both a driver of value and a risk mitigator. In other words, a way to try to control my own destiny."

"We've always been highly selective. I'm not a fan of investing in vanilla, low-risk mergers. In that game, you get nine right and then you give it all back with the tenth. The merger business we tend to do is stuff that's complicated; has hair on it. We want something that we can get involved in, where we can make something happen, where we can make some money at the edges."

Michael Price

"I knew the names of every bone in the body when I was in fifth grade. My cousins were doctors and I was going to be a doctor", Price reminisces. "Then I bought a stock and it tripled – and that was that."

"It had just been announced and the stocks were trading at a certain spread. I knew every fact about the deal. I knew the timing, about the buyer and the seller. Everything. I told Max the story. He gets up and buys 20,000 shares – during my first job interview!"

"Watch what the smart guys do" is one of his mantras.

"Only with experience do you learn how to figure out which deals should go through, which deals make sense, how to psych out why a deal is happening or what's driving the personalities. That's why you don't start in the risk-arb business, you start working for someone in the business."

"So you then tend to take only a very small position until you get more confidence. You don't take a big position at the beginning. Position sizing in arbitrage really matters because that's what determines your success. You've got to be right, but if you have tiny positions in the deals that happen and a big position in one that doesn't, you're done. You're toast."

"My first and most important thought process when a new deal emerges is why is there a deal? Why does this deal make sense? Mergers are not just company A buying company B. It's people, it's integration, it's business strategy, and strategic plans and synergies."

Peter Schoenfeld

"Even when they see inappropriate behavior, many portfolio managers just say, 'Let's ignore it. We know management's not doing what they ought to be doing but why should we take on that risk?' They may even be right in the long run. And at least 50 percent of the time they're right in the short." Thus, Schoenfeld says that PSAM [P. Schoenfeld Asset Management], too, "often will just avoid a deal because it's very time-consuming to go down the activist road." But, Schoenfeld goes on [...] "every once in a while – at least once a year – something really irks us, where the gap between what we think can be created and what's being created is so great that it's worth the effort. We see that gap as a potential profit if there's a clear road map to get to where we want to be. So, unlike some other risk-arbitrage houses, we add an activist element when our moral compass and our financial compass are both pointing in the same direction."

"Assessing the risks includes recognizing that there are some huge egos at play in this arena on the corporate, legal, and on the banking sides."

John Paulson

"It does take – I call it a sixth sense. You can guess and be right once or twice, but to be right almost all the time, to generate smooth returns, it does take a sixth sense. You've got to be 100 percent focused because there are a lot of deals, and the way you get or find things is by 100 percent focus and constant digging, finding information, and understanding the relevance of that information – because when you look back, there are always clues. You want to find those clues before the event happens."

His fascination was sparked, Paulson relates, by one of his NYU professors, who "loved risk arbitrage" and brought top partners from Wall Street into his classroom. [...] The young Paulson became fixated on risk arbitrage. "There was such an aura around it. The risk-arb groups were small, usually five to ten people, but could produce, say, a $200 million annual profit without working long hours. In investment banking, you might have a hundred people trying to earn fees and working all hours just to maybe make a similar profit."

Leverage isn't a tool Paulson recommends in arb deals. "If you use some, you can boost returns", Paulson allows, "while volatility and drawdowns are low. The problem with leverage as a tool is that in the wrong hands it leads to disastrous results. [...] You can't always get it right. If you have leverage when you slip, it takes you down."

Paul Gould

The core of a good risk-arb strategy has always been "and remains, even today, despite all the computers, just common sense about where the risks are", says Gould, "and how they correlate and don't correlate – things that machines can't necessarily tell you. The analysis of deal dynamics and of people's motivations."

George Kellner

"One of my frustrations as an analyst, and even as a portfolio guy, was that you could do a lot of work on a stock and be absolutely right on the fundamentals – but dead wrong on the price. So many factors go into the pricing of securities, there's a real disconnect between the fundamental analytical process and the outcome. Whereas, in merger arbitrage – at least as we practice it – if you follow the dots and you do the work, the outcome is pretty predictable and I like that."

Kellner recalls, "when October of 1987 came around – and the proverbial fan got hit – I got a phone call from the Exchange saying, 'You're in violation of the capital rules. You've got to sell.' They basically forced me to liquidate about 90 percent of my portfolio in a week, which was extremely painful."

"It was a very valuable lesson. Also humiliating and frightening. I learned that you're not as smart as you think you are – and bad things can happen totally unexpectedly." From today's vantage point, Kellner credits his harrowing 1987 experience, in a sense, for his firm's longevity, [...] because it prompted him to implement a number of very strong risk-control and risk-management procedures.

"[...] in the merger-arbitrage business, most of the risk is antitrust."

"When assessing deals, the most important factor for us [...] is whether there is strategic merit to the combination. Is there a strategic reason why these people are getting together? Or is it just a financial deal or a tax deal or some other motivation, which is not as strong or not as good?"

"We basically limit our positions to 2 percent of the portfolio [...]. So our basic metric is that in the worst case we can anticipate, we're not going to lose more than 2 percent of our capital. Over the many years, that's worked pretty well for us."

There is no broad agreement in the risk-arb community about how to handle investments in broken deals, and Kellner is in the "it depends" camp. "Sometimes we sell right away, sometimes we don't, depending on the circumstances. [...] when a deal breaks is very often the worst possible time to sell. A lot of the institutional types will sell immediately, as a matter of discipline, as we well now. We tend to let them do what they're going to do. Then, since we have a fairly good idea, we think, where these stocks ought to trade on their fundamentals, once the dust settles we will tend to leg out of the positions. But if, for whatever the reason, they're trading at a price that's attractive to us at the time a deal breaks – or there are so many other opportunities that it's foolish to hang on to the position – then it's better to take your licking and move into something else that will help you to make up the differential."

"In this business, you can't be dogmatic and intellectually stiff. A Donald Trump would be a horrible arb because he's always right and always a genius. This business is humiliating and humbling because you are frequently wrong. You have to be driven by facts, not ego."

"Probably the best thing you can do, if a deal looks a little spooky, is not do it. The fail rate in announced deals is pretty low – 90 percent or 95 percent of announced deals close. But the downside of the business is that when you're wrong, it's very painful. So you can't be too wrong, too frequently – which makes avoiding busted deals really the name of the game. Figuring out what that risk is and the probability of that risk – which is not a science, it's a little bit of an art – is the key."

Roy Behren and Michael Shannon

"Something [...] very unusual, if not entirely unique, about our research [...] is that we actually go visit companies. They're like, 'Why are you here? Why aren't you just asking questions on the conference call?' But risk arbitrage is like the insurance business. We're taking on the risk that the deal won't close. If you're writing a life insurance policy on someone, wouldn't you want to take a look, make sure they're healthy?"

"Everything is done with the goal of determining the ultimate likelihood of the deal closing successfully. To state the obvious, we want to avoid deals that are going to break, sending the target stock into a steep dive. Another stumbling block we run into from time to time is the emergence of cultural issues between the companies. They always get pooh-poohed at first, 'We get along great!' But then the agreement slowly starts to break down."

"Inevitably, there will be broken deals. There may be a fraud at a company, there may be a natural disaster – anything can happen. We've found that despite our best efforts, probably 2 percent of the deals we invest in won't be successfully completed. We deal with that by limiting our position sizes and properly diversifying. What's more, we hold to a general philosophy that making valuation bets on companies is not our business. So, if a deal breaks, we work our way out of related positions – ideally, methodically and carefully."

"When a deal is first terminated, the stock tends to overshoot to the downside. Some investors have mandates that force them to sell immediately. We've often found it valuable to work our way out of positions slowly."

"[...] there's risk in even 'sure things'."

"Because we don't have an obligation to be 100 percent invested, we won't invest in deals that don't make sense for us. We'd rather be in cash than in a deal that's not attractive on a risk-adjusted basis."

Karen Finerman

"I wanted to be in the action, and I wanted to be the one making lots of money. I loved the image of creating my own destiny and being in control of my world. This wasn't some fantasy future in the way lots of girls announce that they want to be a fashion designer or a singer. I had found my calling. This was going to happen. I was destined for Wall Street."

When a deal breaks suddenly, Finerman says she's learned from hard experience that the best thing for her to do is sell. "I'm out. I'm just out." She continues, "You can revisit the position, even that same day or shortly thereafter. But sell first. There's an objectivity that is lost when you're long and hoping something good is going to somehow happen. Hoping is a terrible strategy. I try to be very disciplined about it – as in, 'I'm here for an event. It didn't happen. We're out.' That is a pretty firm rule for me, and it's painful, but how many times do you see that your first sale was your best sale? My biggest losses always started out as smaller losses."

Deal dynamics, to Finerman, "are endlessly fascinating. Why do they do these deals? What makes a company attractive?" Very often, she says, "what makes a target attractive is just growth-for-growth's sake."

"I used to be so dismissive of companies that would reject bids, saying, 'We have a plan to do it on our own.' But a lot of times they were much better off on their own, over the long term. A 20 percent bump in the price of stock – wow, that's great if you're an arb – and get that over about two months. That's fantastic. But those companies were looking out years."

John Bader

The first question Bader asks about any transaction, he says, is "not the obvious, what's the spread? Or what's the rate of return? It is why?" He elaborates, "What's the motivation? Why are they doing this? Second question: What's the valuation? Does it make any sense? Is it cheap? Is it expensive? I'd much rather invest in a deal – even if nobody comes in and tops the bid – if it's on the low side of fair value because (a) there are that many more chances that something good will happen and (b) there's that much less downside."

Another crucial element is what he calls "constituency analysis". Asking, "Who wants to do what to whom? How are they being paid? How are they incentivized? Who are other constituencies who might block the deal? What votes are in play? Who are the voters? It's all about probing motivations, which are often neither pure nor simple", Bader observes.

Clint Carlson

[...] to this day, Carlson swears that law school is a better training ground for investment work than an MBA "because of the way they teach you to think. It's about weighing both sides of an issue and developing arguments on both sides. It's about not necessarily going in a direct line to a conclusion, which I think is great training for the investment business. That's not to say that you don't need to know the time value of money and how derivatives work and how to do an earnings model. But all that is secondary to being taught how to think – which law school does so much better."

"The funny thing about business in general – but especially entrepreneurial ventures – is that they are irrational. If you looked at the probability of success, you'd realize that you shouldn't do it. So you have to have that naiveté, that belief in your own abilities, or you wouldn't do it."

"I always try to figure out: What is the industrial logic for this deal? Why are they doing it? Is it accretive, dilutive? I do a lot of valuation work and try to understand the businesses – because if I didn't understand them, I wouldn't know what risks could stand in the way of the completion of the deals."

"[W]e always spend a lot more time trying to figure out what the downside could be than we do on the upside – and continuously update the downside calculation over time to track how the values are changing."

"Scarily enough, most M&A deals are not good ideas, but they happen anyway. A lot of it gets buried, so you never really know. But I don't think there's a ton of value creation in M&A. While there are some very disciplined buyers and they do create a lot of value, most of it is just about getting bigger – or just about ego. Sometimes, ego drives the whole process."

When it comes down to it, says Carlson, the core of his risk-arb philosophy is that, "If it's a good deal and both parties want to do it, they will usually find a way to get it done. If there are hiccups along the way, they'll get fixed. But if somebody – the buyer or the seller – decides, 'I don't want to do this anymore', then you're really at risk. They are looking for the first opportunity to get out of the deal."

"I guess the other thing I like about the risk-arb business is that you never really need to worry about selling. I mean, the deal closes and the position just goes away."

Fundamentally, Carlson reflects, "what the risk-arb business teaches you in a hurry is to be a very quick study. You have to learn a lot about the companies and the industries in a very short time – and do it yourself. You've got to know: How many things can go wrong? What are the issues? Who are the regulators? What are the financing conditions? And what can I glean from the merger agreement? Is there something in it that stands out as an unusual risk? All those questions must be answered very quickly."

"You have to realize that companies are pretty sophisticated; they're only going to tell you what they want you to hear. So you have to know what they're really saying. They're not going to give you inside information – you shouldn't be getting inside information – but it's important to pick up the nuances, the changes of tone, in what they say."

A downside of working in risk arbitrage, notes Carlson, is that there is no unique sourcing of ideas. "That's the one thing I don't like. You get your ideas from the front page of the Wall Street Journal. Your universe is the same as every other arb's – so the trades get crowded, no matter how you try to be creative in defining that universe or stretching your portfolio."

James Dinan

"If you love investing and you love human psychology, risk arbitrage is an amazing business. All of a sudden, you're not just investing, you're playing a very intellectual game. You're thinking almost like in a chess game. The best arbs see the moves [...] three, four moves ahead. They see the ending long before the audience has figured out who done it. They can capitalize on the winners by loading up – and also can get out of the others, before they become real losers."

[...] "there's no information advantage anymore in risk arbitrage, there's only a judgment advantage... Arbitrageurs obviously need to have good quantitative skills, but you don't need great quant skills. You do need great judgment, though – and judgment is basically understanding human behavior, the human condition. Because in arbitrage, the decisions are made by humans; arbitrage is driven by individuals."

"There's this tendency – and everyone is guilty of it – when you see a nice spread, see a big return, it's like a moth to a light bulb. You're just drawn to it. But just because it looks like a big, juicy spread doesn't mean you're supposed to do it. [...] The deal may appear attractive, but if there's anything just a little off about it, there are plenty of others. Because the real key is avoiding losers. You are going to miss some of the winners as a result, but remember, you're making nickels and dimes when you are right and losing lots and lots of money when you're wrong. You can pass up a lot of good investments if the benefit is that you skip the disasters."

"That's the scary thing about data – even if it's right, data has a lifespan of uncertain length. What is fact today could be totally wrong tomorrow. You just don't know."

One rule he follows is that when a hitch appears in a deal, "there's never just one. I call it the cockroach theory of investing. When you see one, get out, because there are more to come."

Drew Figdor

When something significant goes awry in the portfolio, Figdor adds, "I go home, hug my wife and kids, and try to remember that there's always [a] tomorrow in this business – that if you learn from your mistakes, you'll succeed." Then, Figdor and his team work through "a process we call an experience transformer. It starts with what we did right, what we did wrong, what we can do better next time – from a positive perspective. That's the key. One of the things I learned the hard way is that if you're yelling at someone about a mistake at nine o'clock in the morning, 'You idiot, you lost me money. What the ---- were you thinking?' everybody in the shop is working on eggshells. No one's thinking about making money and you're not thinking about it, either. Opportunities are lost."

"The market doesn't care what your cost basis is. It's irrelevant, get over it."

Jamie Zimmerman

"So risk arb is really mostly about how to evaluate risk, how to size positions, understand how much the upside will be, when you will get it, and what the potential downside is."

It's always tempting, she notes, to simply focus on potential rewards, "but it's much more disciplined to look at what could [go] wrong; what do I lose if it goes wrong? And how big can I afford to be in this, if it does go wrong?" She concludes vehemently, "The last you want to do is kill yourself. You have to live to fight another day. If you size yourself appropriately and something goes wrong, you can go and make the money back somewhere else."

"Basically, if you're going into a deal", she observes, "it's because you think it's going to happen. But in your portfolio, you have to size it so that if it breaks, you don't lose more than a month's profit – or whatever you think is a measure of an amount that you're going to be able to make back in short order."

"You can only know the joy of victory if you're willing to risk defeat. It's just not realistic to expect never to trip, even if you're always going for the win."

Keith Moore

One lesson, says Moore, that has been driven home to him time and again in risk arb is that "whenever things really get bad – and you have that feeling in the pit of your stomach that everything's going to go to hell – every time, so far in my life – that has been when you should just close your eyes and buy."

"[...] even though many practices in Wall Street have gotten a lot more sophisticated over my career, how people behave hasn't changed. While there are a lot of people doing risk-arbitrage trading, many haven't been around long enough to go through even a cycle or two. Which means their reactions tend to be very knee-jerk – and that creates opportunities. In part, that's because they lack the experience to react differently. But it is also because mechanical risk management systems force many risk arbs to make decisions they might not otherwise have made."

The View from the Other Side – The CEOs

William Stiritz

"I came from an unusual background, and I think the only reason that I'm sitting here in this very, very nice office [...] is that I always had – not the idea, it was more of an intuition – that any time you marched into a new place you had to ask: 'What's going on here? What are these people here for? What is really happening?' Just try to gauge, what is the environment here and how do I act?"

"The best game for future arbs would probably be poker at a real meaningful level. I believe that game requires all the skills of an arbitrageur. You have to be analytical, you have to be able to calculate the probabilities of the cards, and you have to be able to read personalities. Try to second-guess what the CEO and the board will do. Plus, you have to have money management skills to be able to stay in the game."

What he learned, first and foremost over those twenty-odd years, "before I got the big job in organizational life", as Stiritz puts it, "is that you have to be able to get along with people. The other big lesson was that you have to be constantly analyzing. You analyze, you analyze some more, and then you analyze yet again. You have to have an analytical skill set that has you always challenging the assumptions you are given, to try to create a decent business, to evaluate people, and to work to create win-wins in negotiating to affect change."

"The problem with large corporations, where they've developed a centralized command structure over multiple divisions – I think it's fair to say – is that they are less creative, less adaptive, less inventive than a company that is spun out and freestanding. Spinouts are simply better-incented and their managers will think about the task much more intentionally. Their managers are much more engaged, much more involved, than, say, a senior product manager at P&G on product X – to name a company that has been a laggard over the years."

"[...] when you're running a complex enterprise, the art of selecting good managers is critical to success."

"The reality is that any CEO who hasn't played the M&A game before is at a great disadvantage when his company is targeted in a transaction. He does not understand the game he's suddenly involved in."

At heart, Stiritz concedes, "I'm just not a big fan of selling out for the immediate benefit of the activist."

"The managerial quality that's really the most important is creativity – to generate ideas and alternatives and be able to handicap them and select the ones that have the best shot – and then get people in place to bring them about."

Paul Montrone

"I always like to say, when something goes wrong, that there are two types of people. There are people who point fingers and then there are people who look in the mirror. I'm a mirror person. If something goes wrong, I'm not blaming anybody. I look in the mirror and ask, 'What did I do wrong?' or 'What did I learn from this?' or 'What would I do differently if I were going to do it again?' I take personal responsibility. Then I learn."

"Public companies are especially vulnerable to worshipping at the altar of high margins. Today, that's why I always love having a private company that's competing with a publicly held one. The public company has to worry about earnings per share; it's got to worry about short-term investors – and all that stuff at least partially drives what the CEO is doing. Whereas a private company can say, 'Holy jeepers, there's an opportunity! I'm going to kill my earnings this year to do that.' Then, it outruns the public company."

"To me, the only reason to be a public company today is if you can get an extraordinary multiple, and therefore, a very low cost of capital. If you're just an ordinary company plugging away, my philosophy is it's actually a disadvantage to be public."

Generating good long-term returns in business, first of all, requires luck, says Montrone. "Beyond that, my criteria for the businesses I want to be in today are threefold: I want to be part of a big industry, I want to have the wind at my back, and I don't want to compete with the Chinese."

Peter McCausland

"A company is owned by the shareholders and ultimately you have to run it so that the value of their investment goes up." But, he cautions, "If you don't cultivate your customers and take good care of them – and do the same with your employees – well, you might do okay for a few years. But in the long run, you're not going to create value. That's where you run into the long-term versus short-term thing – and the investment community is much more focused on the short-term."

"A customer [...] will be more willing to take a price increase if you've done a great job for him, solved his problems, done things to make him more successful."

"I felt we were being treated pretty unfairly because our shareholders weren't loyal – despite the very good returns we had generated for them over the years. I felt our shareholders should have stayed loyal to us instead of selling to the arbs. That was the most disappointing thing. I mean, arbs are arbs. Although we tried to persuade them and had a great investment thesis, we had no real expectation of loyalty there. In fact, it was frustrating having to meet with them whenever they wanted. But our advisors told us we had to because the arbs had become our shareholders. So we spent all kinds of time with them on the phone. Some of those characters were really awful. Such blowhards – they'd threaten and cajole. We tried to treat everybody as special; hoped we could reason with them. But the arbs and activists were so invested in the transaction happening, they wouldn't listen to our plans for long-term growth."

"[...] I had never been involved in a hostile deal before. I thought that you could reason with some arbs. Get them to see it was crazy, what was going on. Here was a company that had returned 18 percent per year compounded. The largest independent packaged gas company in the best market in the world. If it were ever to be sold, why would it not be sold under circumstances where you could maximize the purchase price as opposed to letting it go to a hostile bidder while the stock was depressed? That's how I approached it. Some seemed reasonable. None of them voted for us."