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become the target of a hostile takeover or leveraged buyout.
This led to the emergence of an "event risk" premium that caused
Colgate debt to trade at a discount relative to the price that
would otherwise obtain. In Colgate's opinion, the market was
overestimating the risks of holding Colgate's debt. Thus,
Colgate's debt was undervalued, and an opportunity existed to
capture subsequent improvements in its perceived credit quality
by repurchasing the debt. Yet, Colgate's flexibility to respond
to this arbitrage opportunity was constrained by the prospect
that a significant reduction in its balance sheet liabilities
would enhance its appeal to a potential acquirer.
Through the collaboration of Merrill's Swap Group and
Colgate's treasury department, from late July to early October
1989, the partnership gradually took shape. Merrill's first
written exposition of the concept, entitled "Colgate Partnership
Transaction Summary", dated July 28, 1989, states: "the primary
mission of the Partnership is the acquisition and control of
Colgate debt". "Colgate Sub.", "A Corp.", and "B Corp." would
contribute $30 million, $169.3 million, and $0.7 million,
respectively. Colgate Sub. would act as managing general partner
with the authority to determine partnership investments. Over a
period of several months, the partnership capital would be used
to acquire long-term Colgate debt from investors. The
partnership would then exchange some of the long-term debt for
newly issued Colgate medium-term debt. Merrill noted that the
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