Free In an Uncertain World by Robert Rubin, Jacob Weisberg

disposition of an active volcano, had developed this kind of transaction after World War II in response to anomalies produced by the wartime boom. During the Great Depression, a number of railroads had filed for bankruptcy, leaving the prices of their shares and bonds badly depressed. During the war years, however, the railroads had been operating at full capacity and, as a result, were flush with cash. Coming through bankruptcy court, they were due to be reorganized in ways that would unlock their real value. Arbitrageurs like Gus would buy the stock of such technically insolvent companies and wait for them to be restructured.
    By the end of the 1950s, that kind of opportunity was also becoming rare. But in the mid-1960s, around the time Gus and his protégé L. Jay Tenenbaum hired me as the junior man in the arbitrage department at Goldman Sachs, the risk-arbitrage business was picking up again, thanks to a wave of takeovers and mergers. By the end of the decade, Goldman Sachs was making significant profits in the context of the times—several million dollars a year—using its own capital for these transactions. Because the work was risky, complicated, and highly profitable, it had also acquired a certain mystique. Firms like Goldman didn’t want their competitors to know how they went about the arbitrage business. In 1966, the year I was hired, L. Jay was quoted in
Business Week:
“Asking about our arbitrage operations is like walking into a couple’s home and asking about their sex life.” While arbitrage is still a big business on Wall Street, it has become much less secretive.
    I’ll try to explain what we did in those days by describing an arbitrage transaction I actually worked on in 1967. Although this deal was in many ways typical of the hundreds I was involved in during my first several years at Goldman Sachs, I remember it well for reasons that will become clear. It was a merger of two companies that were traded publicly: Becton Dickinson, a medium-sized manufacturer of medical equipment, and Univis, a somewhat smaller company that made eyeglass lenses. Under the terms of an announced friendly takeover, Becton Dickinson would buy all outstanding shares of Univis for about $35 million in stock. Shareholders in Univis would get a .6075 share of Becton Dickinson for each share of Univis they held.
    At the time the deal was announced, on September 4, 1967, Becton Dickinson was trading at around $55 a share and Univis at around $24½. If the merger was to be completed, A, or Univis, would become B, or Becton Dickinson, and a Univis share would be worth $33½—at the price of Becton Dickinson when the deal was first announced (.6075 x $55). To decide whether to engage in arbitrage, we had to estimate the odds of the merger coming to fruition, what we would make if it did, and what we would lose if it didn’t—my framework, you might say, for dealing with most decisions in life.
    Such an announced merger could fail to be completed for any number of reasons. It might be called off after either side performed its “due diligence” of examining the other’s books in detail. Or the shareholders of either company might reject the terms of the transaction as not favorable enough. The Justice Department or the Federal Trade Commission might decide that a combination of the two companies was anticompetitive. Regulatory issues might surface. One of the firms might have a history of announcing deals and not completing them, and simply change its mind or be too unwilling to make accommodations on specific matters that arose after the initial agreement in principle. We would weigh and balance the different factors to decide whether or not to take an arbitrage position.
    The first order of business was rapid, intensive research. I had to examine all the publicly available information I could obtain. I had to talk to proxy lawyers and antitrust lawyers. Then I had to speak to