State of the art business for relatively small investment Computers, hugh amounts of date spell success for risk-arbitrage firm.

December 16, 1991|By Ross Hetrick | Ross Hetrick,Evening Sun Staff

When Traci Shanbrun Lerner and her two partners were setting up their new business at the Woodholme Center in

Pikesville this fall, they got some questioning looks from the building's managers.

They would need two satellite dishes installed on the roof, they said. The operation would also require seven telephone lines, several computers and two fax machines, all for just three people.

"They must have thought we were setting up a bookie operation," said Lerner, of Chesapeake Partners.

What they were setting up was a risk-arbitrage operation, a stock trading business that is unique to the Baltimore area. Dependent on massive amounts of fast, accurate information about corporate activities, such operations have traditionally based their operations in financial centers, such as New York.

But with the development of powerful personal computers and the expansion of various information systems, such businesses can now beset up in the financial hinterlands, according to the officers of Chesapeake Partners.

By subscribing to a variety of communications systems and buying sophisticated but inexpensive computers, the firm was able to establish itself with the capital infusion of only "thousands of dollars," according to Mark D. Lerner, another partner in the firm and Traci's husband.

"For a nominal amount of money, we have set up a state-of-the-art facility," he said. Lerner doubts that it could have been done four or five years ago. "If you could have done it, the costs would have been prohibitive," he said.

The risk-arbitrage business of Chesapeake Partners, which started on Oct. 7, involves buying the stock of companies that are going through mergers, acquisitions, bankruptcies, restructurings or reorganizations.

The partnership needs quick access to large amounts of information about the companies in order to know when it is most profitable to buy or sell the stock. Securities are held for periods ranging from a few days to several months.

Traditionally, the necessary information was gathered in the financial centers by couriers and messenger services running between the large brokerage houses and various government and corporate offices. The firms themselves maintained large research libraries with background information on thousands of businesses. All of this took a great deal of manpower, space and proximity to information sources.

But now this is all available in the one-room office of Chesapeake Partners, which is plugged into the national stock market information flow.

The partnership has access to major news wires such as Dow Jones and Reuters and can instantly call up corporate filings with the Securities and Exchange Commission through a service called Federal Files. Another services allows them to see how many shares of a particular stock are bought and sold as it is being done on the major stock exchanges.

Information about companies can be faxed to them by various research companies. These faxes can be printed out or can go directly into a computer, where they can be stored and used.

Both Mark and Traci Lerner had been working in the New York financial district. Mark was heavily involved in leveraged buyouts of companies and had worked in the mergers and acquisition group at Merrill Lynch Capital Markets. Traci was the head of the risk-arbitrage department of Dillon, Read & Co. The third partner, Louis A. Sarkes Jr., had worked with Traci in the re

search department at Dillon, Read.

The move to Baltimore was a "quality of life" decision, Mark said. The couple did not want to raise their 3-year-old daughter and 8-month-old son in New York, he said. It was also a homecoming to Mark, who had grown up in the northwest suburbs of Baltimore and has remained a loyal Oriole fan.

The partners declined to talk about the size of the firm's investment pool. However, their goal for 1992 is $30 million and $100 million by the end of 1994. "We are on target for the 1992 goal," Mark said.

The firm has about 20 to 25 investors, who range from wealthy individuals to pension plans, insurance company funds and profit-sharing plans. Investments in the company are sold as limited partnerships with a minimum investment of $500,000. But there are some exceptions to that rule, Traci said.

Despite the fact that it is called risk arbitrage, Mark said the investment's riskiness is in line with the goal of achieving a 20 percent return. He also said the firm decreases the risk by diversifying its portfolio.

However, he advises individuals and institutions to limit their investment to between 10 to 15 percent of their total portfolio. "We make sense in a larger diversified portfolio," he said.

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