The Event-Driven Edge In Investing Author Interview

Follow Asif Suria on Seeking Alpha The transcript found below is for readers who would like to follow along. Please note that the transcription may not be 100% accurate. Daniel Snyder: Hey, everyone. Thank you so much for taking a moment to check out this engaging conversation with me and Asif Suria, the author of a brand new book called, “The Event-Driven Edge in Investing.” He has, interestingly enough, come full circle. And what do I mean by that? Well, he was one of the original contributors of Seeking Alpha way back in 2005. So, Asif, thank you for joining me today to talk about your book. And I got to say, as a Seeking Alpha employee and a fan of Seeking Alpha and a user of Seeking Alpha, I thank you for starting so far back when with David Jackson because look where we are now. This is just amazing. Great to have you here on the program today. How are you doing? Asif Suria: I’m doing great. Thanks for having me on, Daniel. I’ve watched the evolution of Seeking Alpha over 19 years as a contributor, and it’s just been a phenomenal ride, if you will. The platform has expanded so much, and I think David Jackson’s vision, just seeing it come to fruition has been amazing. DS: It’s come a long way indeed. I mean, I’ve done the history research of the company myself, and, man, it has come so far. So, it’s great to be here, and it’s great to have you here. So, I want to step back a second and just start from, a, how did you get into investing, and then how did you find your way to event-driven arbitrage opportunities, because there’s so many different types of investing and trading styles out there? AS: Yes. I got into investing about 23 years ago in 2001. The dotcom bubble had burst. Things had started looking a little bit cheap, but quite clearly, I was early. So, I got into investing then. I was in the technology sector. So, I had technology background. I was building a web-based SaaS systems for a university. So, just looking at the aftermath of the dotcom bubble bursting, things started looking interesting, but, clearly, I was very early, like most people are. Once a bear market starts, they can be quite deep as we saw in 2008, 2009. Same thing happened from 2000 to 2003 as well. So, as I went through the process, I did what most investors tend to do, which is, you pick up Benjamin Graham’s, Intelligent Investor. You read Security Analysis. Then you move on to, Phil Fisher. So, you read all the investment grades. You start looking at value investing, growth investing. And then eventually, you evolve into building discounted cash flow analysis model. So, all of that, mostly self-taught. So, I did that for a really long time, and then you ran into 2008, 2009, which was a very deep bear market. So, even if you had anticipated that some of that was going to happen, the depth of that bear market and how deeply impacted the financial system was, was quite shocking. So, around that time, I got introduced by a hedge fund manager, actually, thanks to Seeking Alpha because I had started contributing and sending in my articles to David Jackson in 2005. And so thanks to Seeking Alpha, I connected with a bunch of hedge funds, and one of them introduced me to Merger Arbitrage and started sending me a few ideas to take a look at. So, one of the early deals I got interested in was way back when Oracle was buying Sun Microsystems, and there was an 8% spread or profit potential on that deal because there were concerns that Europe might not approve that deal. So, it’s amazing to see how some of the same concerns are playing out right now as you and I were discussing earlier about with Activision Blizzard, it was the UK that held up the deal at the very tail end. So, it was similar things back then. And so that was fascinating to me that, you could have all these strategies that might be countercyclical to what’s happening in the markets, and that’s what got me interested in event-driven strategies. DS: Yeah. And so you dive into it. You lay out these 6 strategies in your brand new book, as I mentioned, The Event-Driven Edge in Investing. So, I was hoping today, maybe we could just through an overview of what you dive into and with the book. And, I mean, I really just want to start with Merger Arbitrage. Obviously, as you mentioned, we were talking about Microsoft and Activision, and it was the risk arbitrage, right? It’s when the deal’s announced and there’s a spread, and why is there a spread? Maybe you can dive into that a little bit. AS: Yeah. As you mentioned, Merger Arbitrage is also known as Risk Arbitrage. More recently, people talk about it as Merger Arbitrage, but that doesn’t mean you should forget about the risk. The reason you get to get a chance to make a profit with the Merger Arbitrage is because you’re taking on 2 or 3 different kind of risks. You’re taking on the risk that the deal might not close, because either the shareholders might reject the deal, or a regulator might step in and block the deal. You also are risking your money, you’re tying it up for a period of time, and that is time value of money. So, you’re getting compensated for the time value of money for the 3 months, 6 months, or 4 years the deal might take to close. Deals usually don’t take that long. They mostly tend to close in about a 120 days based on our data looking back over 12 years, but every once in a while a situation comes along like Genworth, where the deal lasted for 4 years before actually failing instead of completing. So, it’s called Risk Arbitrage because you are taking on the risk from regular investors, and you’re betting that the deal is going to close, and you’ll pick up the difference between where the stock is trading right now and the deal price, if you will. A great example of that was, Activision Blizzard. So, right before Microsoft decided to buy them, they’ve been hit with some sexual harassment lawsuits. The stock had come down quite a bit when it was trading around the $65 level. So, that was a great price for Microsoft to make the offer and buy it for over $95 a share. Bobby Kotick probably wanted Microsoft to step in and give it the Microsoft golden touch, if you will, in terms of the culture and so on and so forth and transform the company that way. It was great fit for Microsoft because there was all this noise about the Metaverse and Zuckerberg spending billions of dollars and building that out. And Activision Blizzard gave Microsoft a way to get into that direction. They already had Xbox. But all that aside, when the deal was announced, so stock moved up, but for a while, it was trading at around $80 a share, which meant that if you bought Activision Blizzard and the deal closed, you got to make about $15 a share when it closed at $95. However, if the deal were to not go through, most people expect it to drop to the level it was trading at before the deal was announced, which in this case was $65 a share. So, Warren Buffett, who does Merger Arbitrage from time-to-time, he was in, IBM’s acquisition of Red Hat. He was in Bayer’s acquisition of Monsanto. He decided to buy Activision Blizzard as well for the arbitrage spread. He got in at about $80 a share. In that case, I waited until it got down to $75 because the way I was looking at it, it was about a $10 downside in case the deal did not go through, and it dropped to $65, and $20 of upside with the probability of anywhere between 40% to 50% that the deal might go through. So that was an exciting situation, and the odds seemed quite favorable in that deal. DS: So just curious, having been a veteran in the merge arb space, I mean, there’s a lot of deals that haven’t been going through, specifically recent years, right? I think about Adobe and Figma. I think about NVIDIA and Arm. Is there anything that you see when these humongous deals are announced that you go, this is a red flag, I’m not going to touch it. AS: Yeah. So, several deals haven’t gone through. When we looked at our data, and the last time I refreshed the data was last year because I was putting it together once again for the book. So, I looked at about 12 years of data, and surprisingly 95% of all deals closed. That has changed over the last, I would say, 18 months or so. The regulators have really gotten, stricter, if you will, in taking a look at how these deals are taking place. So, Adobe Figma was a great example. Figma wasn’t a public company, so a Merger Arb situation didn’t exist in that case. Again, with Broadcom, that deal didn’t fully materialize, if you will, but there were other deals that failed. Amazon tried to buy iRobot, and that got blocked, because there were concerns related to privacy, and Amazon having all the data that the iRobot Roomba Vacuums end up collecting as they go around your home. There was also JetBlue’s acquisition of Spirit Airlines that was blocked recently. So, the Merger Arb world has been shaken a little bit by the regulators really stepping in, and deals that we would have previously expected to go through without regulatory issues are being challenged now. So, when I look at a large deal and I see that it’s either a large tech company trying to buy another company, that could be a big red flag. And if it’s a company buying another company within a marketplace that might leave it with a very concentrated market share, obviously, that is a big concern as well. DS: Got you. Thank you for clarifying that. Now, I want to dive into, one of the other things you cover is insider transactions, which we talk a lot about here on Seeking Alpha through various pieces of content because Seeking Alpha actually has the Form 4s listed onsite that people can find for each of the symbols. So, why don’t you go ahead and just maybe give a brief overview about what to watch with insider ownership or the sells or the buys or how do you approach that? AS: Yeah. So, when I first started things out, I had two separate websites. One was dedicated to Merger Arbitrage, another was dedicated to Insider Transaction. So, these are the two strategies I’ve followed the longest. I combined them about 8 years ago into Inside Arbitrage. And from there, we went to 6 strategies from the original two strategies. Insider transactions is close to my heart that that strategy is fascinating in terms of the idea generation capabilities it has. So, there are a lot of purchase transactions, a lot of sales transactions. There might be hundreds of them that come in every week. So, it creates both a lot of noise because you have to look through these transactions to understand which ones are meaningful and which ones aren’t. And at the same time, it provides opportunity because you might come across companies you would have never heard of otherwise or never paid attention to. So, that’s why I like the idea generation aspect of insider transactions. But what’s happened over time is, Peter Lynch has said that an insider might sell their stock for all kinds of reasons. They’ll only buy it for one reason, putting in their own money to buy more of the stock, because they think it’s going up. Investors took that phrase to heart and so did company management teams. They knew that investors were watching what they were doing. And because of the theory of reflexivity that George Soros talks about in his book, they started buying in some cases just to signal the market. And so, you would see that an insider transaction would come through and the stock might spike for a short period of time and then settle back down to where it should be trading. And so the interesting thing is you got to look at each transaction and understand, is this an interesting company based on its underlying fundamentals and not just because of this insider transaction? And if you can figure out the motivation for the insider for buying the stock, is it merely to get more people to look at the stock and move the stock price up, or do they really believe there’s something interesting happening, under the covers, if you will? DS: Yeah. And you dive into some incredible examples in the book that I’m not going to bring up because people obviously need to go read the book and dive into all this great information you share, but it leads into what your next chapter was about, which is stock buybacks. Right? And when you see insider buying with stock buybacks, it’s a little recipe for success almost, isn’t it? AS: It is. And so that area is fascinating. Companies announce buybacks and sometimes don’t go through with them. They would announce these large buybacks, and when you actually look at shares outstanding from the 10-Ks and the 10-Qs, you don’t notice the shares outstanding go down as much as the large buybacks they had announced. A couple of reasons for this could be that they might just take a really long time to complete the buyback. It might be over a period of 2 years or 4 years. Sometimes it’s because they are diluting shareholders through excessive share based compensation. So, some of the buyback is going to offset that. And in some cases, they’re just trying to signal the market again. But there are companies where everything aligns. You start seeing a company buy back its stock. You see the actual shares outstanding go down over a period of time, and you’re finding that the insiders buying at the same time with their own money. Insiders have already been awarded a lot of stock through options and restricted stock units. And for them to go above and beyond and buy more stock with their own money could be a signal. So, we like to combine both of this, stock buyback by the company along with the buying of an insider in a screen we call the Double Dipper. And so, then we look at the Double Dipper and say, hey, here’s a list of 20 companies where both the insiders are buying and the company is buying back stock, and is there something interesting here that’s worth exploring? So, once again, it’s a great way for idea generation where your interest as an investor are aligned with both the company and the insider. DS: Asif, I got to ask you right here on the spot because just a few weeks ago, one of the biggest companies in the world, Apple, just announced the biggest stock buyback program ever. What are your initial thoughts about theirs? AS: So, the Apple buybacks actually result in a decline in shares outstanding, right? So, I was in Omaha, watching Warren Buffett talk to the whole crowd of 40,000 people that were there for the whole day. It felt different this year. He didn’t have Charlie Munger on his side, so the energy levels were a little low, but he was asked about Apple, and he said that by the end of the year, Apple will still be the largest position in the Berkshire Hathaway portfolio, but that doesn’t mean he’s going to not continue selling Apple. They sold some Apple in Q1. I think they’re going to continue selling Apple because Apple is a different company right now, both in terms of the valuation, as well as growth from where he had bought a stock. So, Apple had a situation where, Carl Icahn got involved with the company, convinced the company to start buying back stock, and they realized that was actually really good advice and it worked for them. And it has continued to work for them for a really long period of time. I just feel like going forward, maybe that’s not the best use of their capital. So, you got to look at each company and say, something worked for a period of time, does that mean it’s going to continue working? And maybe should they be deploying the capital elsewhere at this point in time? So, it’s great to see the large buyback, but it’s interesting to look at that in the context of Buffett scaling back the Apple position in Berkshire Hathaway’s portfolio. DS: Yeah. That’s really interesting insights there. Want to dive into this next event-driven edge of a four letter word to someone on Wall Street, but we’ve all heard about it over the last few years because it was on the rage during the COVID stock market boom, and that’s SPACs. Can you just give us a little high level overview of what you look for with SPACs? AS: So, SPACs, as you know, Special Purpose Acquisition Company are companies that have raised a bunch of capital, and they’re looking for operating businesses to acquire and take them public. So there was a SPAC bubble that we experienced, as you mentioned, during COVID where, quite a few SPACs were created, and they all went hunting for good operating businesses. In most cases, I would say the vast majority of them, they ended up picking companies that probably shouldn’t have gone public. It was too soon for them to go public. So, when I look at a lot of SPACs and you look at the investor presentations, most of them look like they’re science projects, instead of real companies. And so, SPACs provided some really interesting opportunities both on the long-side and the short-side. So, on the long-side, investors could buy these SPAC units. And then after a period of time, a few weeks later, those units would split into common stock and warrants. So, the arbitrage situation there was most event-driven investors who buy the units, they would wait for the split. And when the business combination with an operating company was announced, they would basically vote against it, and they would get their money back on the shares while holding on to the warrants just in case the company became an overnight success or went on to do very well. So, there was that arbitrage opportunity that attracted a lot of people. And what you noticed over time is, in most SPACs, most of the investors who had invested in those units used to want their money back. And these SPACs then had to go raise capital through a pipe, through other means, if you will. And then we looked at our data, and we were shocked looking at 3 years of SPAC returns to see just how bad the returns were of this group of companies. And I looked at academic research, a friend, Ross Greenspan had written in a research paper, and I looked at his data, and it essentially confirmed what we were seeing from our database. So, it’s fascinating to see the SPACs could be a source of idea generation on the short side. And so, that’s something we also started taking a look at. In the Inside Arbitrage Model Portfolio, we have multiple short positions related to SPACs. And one of the ones that I personally participated in was WeWork. The company tried to go public through a traditional IPO that didn’t work, and so they went public through a SPAC. And while the service was great, I happened to go to their Salesforce Tower location in San Francisco, and it’s this beautiful location, and the service was great, but when you looked at the balance sheet of WeWork, you basically realize it didn’t matter if they got up to a 100% occupancy. It didn’t matter if they started charging twice what they were charging. This company was never going to make money. And to top that all, they had a CEO at the helm who had experience taking a company through bankruptcy and growing at post-bankruptcy. So, you had everything come together where the fundamentals of the business were not right. This was a company that went public through a SPAC, and you had a CEO who had experience taking a company through bankruptcy. And so, the logical conclusion was you short this company. That said, Daniel, I should warn people that shorting is never as easy as it seems. You could end up with unlimited losses. And in this case, I had used put options, but you can go read several books, including the one by David Einhorn about how long and painful, short position can be even if it plays out in the end. DS: Yeah. That’s a great disclaimer. Now, quick question for you. In the book, Option Strategies, you just get into options a little bit and I think that’s an interesting way to play because you know what your risk is ahead of the time. Is there anything you want to say about how you navigate the option field? AS: Yeah. I mostly use options, either to hedge risk. So, a Merger Arbitrage situation that was one where UnitedHealthcare was buying Change Healthcare, and that deal was being challenged by the regulators. In that case, I bought put options to protect my downside in case that a deal did not go through. So, sometimes I might use it to protect downside. There was a situation where Apollo, the private equity firm, was buying Apollo Education, the company that, basically runs the University of Phoenix, if you will. And in that case, I used, call options, to limit my risk and to juice my upside, if you will. For the most part, I use options as the house. I like to write options rather than buy them. As I like to say, I can count on one hand the number of people who make money buying options rather than writing them. So, I might use it as a specific strategy either to hedge or to juice returns, but for the most part, I’m actually writing options. DS: Brilliant. Brilliant. I’m glad we got to slip that in there right there. So, within these last two Event-Driven Edge chapters, I wanted to combine it through the lens of General Electric because I really think this company and the turnaround that it’s seen encompasses both of these, and let’s just combine them together. It’s spin-offs, right? We’ve seen GE break-off and get rid of the conglomerate discount, if you will, and then management changes, right, with Larry Culp coming back as CEO. Maybe we can take General Electric and just maybe you break that down a little bit of why these work or why they tend to work? AS: Yes. So, management changes are very important, but management changes can take a long time to play out. Even in a smaller company, you might start seeing the impact of the new management maybe after two or three quarters. In a larger company like GE, which was significantly troubled when Larry Culp came over from Danaher, the change took almost three years. It took him that long to start fixing the balance sheet. In the case of Pat Gelsinger, who has a strong technology background and is back at Intel, we still haven’t seen that turnaround happen almost 3.5 years after he’s joined the company. So, management changes are fascinating because it truly can change both the culture and the outcome for investors, but you have to look and understand who the new CEO is, what their track record was. So, when Larry Culp came over to GE from Danaher, I was excited because Danaher had done really well. Under his leadership, the stock went up tenfold. And so, here he came into this really troubled situation with a lot of mismanagement, if you will, and balance sheet with a ton of debt on it. And what he started doing was, he started selling off business divisions. So, he sold their aircraft leasing division to AerCap. He started spinning off the GE Healthcare division. The most recent spin-off that completed last month was of GE Power. And as he went through these spin-offs, he started, obviously, as parent companies tend to do, it’s been load them up with debt. And what that meant was the parent company, GE, ended up with a much better balance sheet. Basically, no net debt. So, they do have debt, but they also have a lot of cash. And so they ended up with no net debt, which was just fascinating to watch. In the middle of all of this, you had a third thing going on. I saw Larry Culp buy shares in the open market, and that’s what really got me interested. He bought at $50 or $80 a share. I think it was $80, and it dropped to $50 after he bought. And I felt like it was just wonderful opportunity to get into this turnaround situation. DS: Yeah. One of the greatest to probably ever do it. Asif, I mean, I just want to make sure that people understand how great this book is and how easy it is to read. I mean, there’s so many tips and tricks and hints and examples that you provide through all of your research. And I think that’s really, like, the most compelling reason that I’m recommending everybody needs to go read it. Right? It’s like when you get into the things that I don’t want to bring up here, even though they’re so compelling, I mean, you’re like, oh, this is a formula. This is something I can find because I see this, and I see this, and this is where I can find this, and how I read the stock, and you combine it all together, and you go, wow, this is really like, the probability is starting to stack up. So, I just want to thank you so much for the time today to run through your book. Everybody, it is The Event-Driven Edge in Investing. Highly recommended. Go check it out and Asif is there anything you want to say before we jump off? AS: No, this was fun conversation. To your point, every strategy has both its opportunities and its risks. So, the way I structured the book was to introduce two case studies for each event. One was a case study where things worked out great, and one was a case study where things did not go the way you would have expected it to. So, just making sure you balance the risks with the potential opportunity. And that’s what I’ve tried to do to present a balanced view on each of these strategies, if you will. DS: Amazing. Love that so much. Thank you so much again for taking the time to join us today. And are you on X by chance, or where do people follow you? AS: Yeah. I’m on X as Asif Suria. I’m also on my website Inside Arbitrage. I’m on Seeking Alpha and LinkedIn. You can just search for Asif Suria, and you’ll find me in all of those platforms. DS: There you have it. Go give him a follow. Go check out his book everyone. Thank you so much for checking out this video today, and we’ll see you here soon in the next video. Take care, everyone. Have a great day. Follow Asif Suria on Seeking Alpha

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