Riding the tiger of volatility
It's not just the retail market for equity-linked structures that's booming. During the 1990s, some of the worst derivatives scandals surrounded the investments that broker-dealers had sold to corporates, including Procter & Gamble and Yakult.
But now the derivatives deals done for corporate clients are different. Many relate to M&A activity. For example, failed takeover bids can leave unwanted holdings behind. And although in most countries bidders are not allowed to trade in their target during a takeover, there is little to stop them taking out a sneaky hedge before they build up a stake. This is one area where some investment banks become reluctant to talk.
Derivatives can help you finance a merger bid. In one takeover proposal not yet publicly announced, Warburg Dillon Read advised a company that was obliged to bid for 100% of its target, but could only afford enough to gain majority control. Warburg designed an offer consisting of cash for 55% of shares plus puts on the target's stock, which protect shareholder's remaining stakes. The bidding company is confident the puts won't be exercised since, thanks to synergies, the stock should head north.