Pittsburgh Post-Gazette – Daniel Arbess got a call from a broker in early February pitching him shares of Riverstone Networks Inc., a Santa Clara, Calif., Internet-equipment company that had filedfor bankruptcy protection the day before.
Like others willing to take a bet on troubled companies, Mr. Arbess often buys the bonds of such “distressed” companies, as they are known by professional investors.
But Mr. Arbess made the stock trade, buying an undisclosed number of shares for the New York hedge fund he manages, Xerion Capital Partners. His bet: Riverstone should be able to get a higher price for the assets it was selling than the $170 million Lucent Technologies Inc. had offered the company earlier. Mr. Arbess backed up his bet by helping to form a committee of Riverstone shareholders that pushed the company to hold an auction of the assets.
In late March, Lucent ended up as the winner of that auction, but at a higher price: about $210 million. That transaction closed last week, and Mr. Arbess reckons his fund’s share of those proceeds equated to a 30 percent return on an investment he had only held for two months.
Mr. Arbess is among a small but growing band of distressed investors starting to play on the side of shareholders. The development dovetails with a broader trend of hedge funds becoming more vocal investors, sometimes even taking on corporate management with other “activist” shareholders.
In the past, distressed investors have almost always bought bonds, because bondholders of a bankrupt company are more likely to get some money back than are shareholders, who typically end up with worthless or canceled stock. Bondholders and other creditors also dominate financial negotiations with the company by forming committees that are recognized by bankruptcy courts. Stockholder committees are rare.
Or they were. In the past five years, other distressed investors, including hedge funds Appaloosa Management L.P. and Mellon HBV U.S. Event-Driven Fund L.P., have bet on the stocks of companies in bankruptcy proceedings, and these investors have sought court permission to form committees to represent their interests.
