This NY Times article reports on an interesting twist to the current takeover battle involving Mylan Laboratories‘ bid for the generic drug maker, King Pharmaceuticals and legendary takeover expert Carl C. Icahn‘s typical strategy to extract some ransom from Mylan’s takeover bid. Mr. Icahn owns about 10% of Mylan and, of course, opposes the bid for King.
Turns out that a New York-based hedge fund called the Perry Corporation owns seven million shares of King and is attempting to profit from the spread between the price Mylan offered for King shares ($16.49) and King’s actual share price (closed yesterday at $12.42). If Mylan’s bid is successful, then Perry would make a cool $28 million on the deal.
However, in making its play, Perry appears to have set up an elaborate swap trade with Bear Stearns and Goldman Sachs so that Perry now controls about 10 percent of Mylan‘s votes with limited or no exposure to fluctuations in Mylan’s share price. Perry appears to have accomplished this by buying 26.6 million shares of Mylan while having Bear Stearns and Goldman Sachs “short“ the same number of shares. The result of the transaction is that it removes any risk of price fluctuations for either side.
The move leaves Perry as the largest, albeit indirect, shareholder of Mylan and most likely means that Mylan will receive enough shareholder votes to approve the deal for King. As a high school football coach once told me while describing the reaction of his booster club to a failed trick play, “that went over like a turn in a punchbowl” with Mr. Icahn, who the Times quotes with self-righteous fury:

“If this is true, in our opinion, this maneuver is rigging an election, plain and simple, and robbing shareholders of the right to have a meaningful vote – one of the few rights they have left. If hedge funds or any other investors are permitted to dictate the outcome of corporate elections without having economic interest in the companies, then any semblance of corporate democracy we still have in our country would become a travesty.”

Translation of the above quote from Mr. Icahn:

“I sure wish I had thought of that!”