That was all a secretary who works for one of Wall Street's leading arbitrageurs needed to say yesterday to sum up the reaction in her office to the news that another big oil merger unexpectedly had been called off.
Professional speculators, known as arbitrageurs, who purchased the shares of Diamond Shamrock Corp. and Occidental Petroleum Corp. were shocked when the companies unexpectedly called off their planned $3.2 billion merger late Monday afternoon.
Arbitrageurs speculating in these stocks and three other billion-dollar takeover targets, Phillips Petroleum Corp., Northwest Industries and Textron Inc., reportedly have lost hundreds of millions of dollars recently as these stocks dropped dramatically after buyouts were called off or postponed.
Experts said yesterday the recent losses were the worst suffered by the arbitrage community since the merger of Cities Service Co. and Gulf Corp. unexpectedly was called off in 1982. However, they said the biggest losses recently appeared to be concentrated in the hands of a few investors with disproportionately large positions, especially Ivan Boesky & Co., while the losses suffered in 1982 were broadly distributed.
"People aren't happy," said George Kellner, managing director of Kellner, DiLeo & Co., a New York-based arbitrage firm. "But this is just part of the game. This is a risky business and you have to be right more than you are wrong because the penalty for being wrong is quite high.
"The way these two large transactions Occidental-Diamond Shamrock and T. Boone Pickens Jr.-Phillips Petroleum blew up is a dramatic illustration of that. This is a hard game to play. This has been a tricky period."
"A lot of people have really suffered in the last month," said another arbitrageur, who recalled the enormous profits arbitrageurs made last year when Chevron Corp. purchased Gulf Corp. in the biggest merger of 1984.
Generally, arbitrageurs purchase the stock of public companies when they are identified as takeover targets, expecting to profit when the deal goes through. When a pending deal falls through and the price of a stock drops dramatically, many arbitrageurs sell the stock and take their losses to avoid incurring heavy interest expenses because they usually purchase some of the stock with borrowed money.
Sometimes arbitrageurs will try to profit on a deal two ways, as they did in the Occidental-Diamond Shamrock deal, by buying the stock of Diamond Shamrock, the target company, and then attempting to sell it at a higher price, and by "shorting" the stock of Occidental, and attempting to replace those borrowed shares at a lower price.
Occidental's shares were expected to fall because the company would have been forced to borrow heavily to finance the Diamond Shamrock acquisition, weakening its balance sheet, and because of uncertainty about the wisdom of making the acquisition. When a stock is "shorted" or "sold short," an arbitrageur sells borrowed shares that it hopes to purchase later at a lower price, profiting on the difference.
But the arbitrageurs guessed wrong and took losses yesterday after the deal was officially declared to be dead, as Diamond Shamrock stock fell 1 7/8 to 18 1/8, and Occidental stock went up 1, to 25.
In other recent deals, the immediate losses have been more dramatic. For example, Phillips Petroleum stock has dropped from a high of 56 1/4 to yesterday's close of 44 since T. Boone Pickens Jr. dropped his bid to acquire the company in the last week of December. Wall Street arbitrageur Ivan Boesky is believed to have purchased several million Phillips shares.
Although on the surface it appears that arbitrageurs are simply aggressive investors, some Wall Street professionals believe the arbs perform a vital function for public stockholders in merger battles. By purchasing large amounts of stock from the public after a deal is announced, arbitrageurs enable public stockholders to convert their stock to cash at a premium.
In takeover battles, the arbitrageurs attempt to profit on the spread between the price of the stock they buy from the public when a deal is announced, and the price of the stock when the deal closes. They assume the risk that the deal may fall through in return for the opportunity to profit on that spread.
"I think they provide a very useful function," said Joseph G. Fogg III, managing director of Morgan Stanley & Co. "If I am a public stockholder who owns stock purchased at 30 and I can sell it to an arb at 57, that makes a lot more sense than having to invest time and effort to make an informed judgment as to the likelihood of the deal going through at 60 . They are providing a service in letting me get 80 to 85 percent of that premium."