Risk Arbitrage Research Bulletin

Risk/Reward Analysis in Risk Arbitrage

This report contains the following sections:
n Introduction and Assumptions

March 8, 2002 n Risk

n Reward
Andrew T. Whittaker
(212) 526-5415 n Benchmark Probabilities
awhitta1@lehman.com
n Comparing Deals?
Evren Ergin
n Sample Risk/Reward Analysis
(212) 526-9376
eergin@lehman.com n Conclusion
Sugun V. Kapoor
(212) 526-2444
skapoor1@lehman.com
Overview
Christian Correa Calculating the expected return from a risk arbitrage investment is inherently difficult because
(212) 526-7857
ccorrea@lehman.com it requires assumptions about the probability distribution of deal returns across different
outcomes. The risk arbitrageur has to think about multiple possibilities including opposition to
the deal by antitrust authorities, changes in deal terms, alternative bidders, and deterioration
in target or acquirer fundamentals. Antitrust analysis, fundamental and industry research, prior
experience, and a good understanding of the merger terms aid the risk arbitrageur in making
assessments about a deal, but there is no reliable method for quantifying the probabilities of
different outcomes.

Under certain simplifying assumptions, the arbitrageur can derive “benchmark” probabilities
using estimates of risk and reward in a transaction. These benchmark probabilities may then
be compared with the probabilities that reflect the arbitrageur’s subjective assessment of the
transaction.

We favor the use of risk/reward analysis in situations where the number of material
assumptions required in the calculations is minimal. We believe that the risk/reward analysis
is an integral part of evaluating risk arbitrage deals and should be used in conjunction with
solid regulatory, fundamental, and legal analysis.

http://www.lehmanlive.com
Risk Arbitrage Research Bulletin

Introduction and Assumptions1

Calculating the expected return from a risk arbitrage investment is inherently difficult because
it requires assumptions about the probability distribution of deal returns across different
outcomes. The risk arbitrageur has to think about multiple possibilities including opposition to
the deal by antitrust authorities, changes in deal terms, alternative bidders, and deterioration
in target or acquirer fundamentals. Antitrust analysis, fundamental and industry research, prior
experience, and a good understanding of the merger terms aid the risk arbitrageur in making
assessments about a deal, but there is no reliable method for quantifying the probabilities of
different outcomes.

Under certain simplifying assumptions, the arbitrageur can derive “benchmark” probabilities
using estimates of risk and reward in a transaction. These benchmark probabilities may then
be compared with the probabilities that reflect the arbitrageur’s subjective assessment of the
transaction.

One of these simplifying assumptions is risk neutrality. This assumption may generally be
reasonable for investors that have access to large amounts of capital and can shift this capital
across different assets at relatively low cost. We do not suggest that risk arbitrageurs are
necessarily risk-neutral, but the risk/reward analysis under risk-neutrality provides a useful
benchmark for decision making.2

A risk-neutral investor is typically defined as one who is indifferent about a fair gamble.3 Risk-
neutral investors have linear utility functions and care only about the expected return on their
investments. The variance of asset returns is irrelevant in their risk-neutral world. These investors
will demand an asset up to the point where the expected rate of return on the asset is equal
to the risk-free rate. If the expected return on a given asset exceeds the risk-free rate, risk-
neutral investors would bid the price of that asset up until its expected return falls to the level
of the risk-free rate. Similarly, when the expected return on an asset is less than the risk-free
rate, the demand for that asset would fall to reduce its price until its expected return rises to
the level of the risk-free rate. At the optimal point, the risk-neutral investor is indifferent between
investing in the risky asset and the risk-free asset.

The implication of risk neutrality for risk/reward analysis is that a risk-neutral arbitrageur
would be willing to invest in a deal up to the point where the expected return from the deal is
equal to the risk-free (or some low risk) return.4

In order to make the derivation of the benchmark probabilities tractable, the arbitrageur
would have to limit the number of states of the world and estimate the returns in these states.
In the simplest case, there are two possible outcomes: (i) deal completion (DC), or (ii) deal
termination. The probabilities of these outcomes sum to one. We will refer to the estimated

1
This report was initially published in Global Arbitrage Research: Second Quarter 2001 Review (August 6, 2001).
2
Our aim is not to characterize risk and reward in risk arbitrage, but mainly to offer a simple analytical framework for assessing these investments. For a
recent characterization of risk and return in risk arbitrage, see “Characteristics of Risk and Return in Risk Arbitrage” by Mark Mitchell and Todd Pulvino (The
Journal of Finance, December 2001). This paper finds that returns in risk arbitrage are similar to those obtained from writing uncovered put options. The
authors conclude that risk arbitrage is appropriate only for those investors that are willing to incur negative returns in severely depreciating markets and limited
positive returns in flat and appreciating markets.
3
A “fair gamble” is defined as a situation where the expected return from the potential outcomes equals the cost of “playing the gamble.” Risk-averse investors
demand a risk premium to be willing to undertake a fair gamble. Risk-seeking investors, on the other hand, are willing to pay to undertake a fair gamble.
4
We adopt the convention that investment in a deal entails a long position. Note that the arbitrageur’s investment may consist of either a long or a short
position in the deal.

2 March 8, 2002
 Risk Arbitrage Research Bulletin

returns upon deal completion and deal termination as “reward” and “risk,” respectively.5 After
estimating the risk and the reward in a deal, the arbitrageur would solve the following
equation for the benchmark deal completion probability, P(DC):

P(DC) × Reward + [1 – P(DC)] × Risk = Risk-Free Return

P(DC) is thus the probability of deal completion that makes an investor indifferent between
investing in a deal and investing in a risk-free (or low risk) asset. If the arbitrageur subjectively
believes that the completion probability is greater than the benchmark probability for a given
deal, he may be willing to invest in the transaction.

As indicated above, the probability calculation requires the arbitrageur to estimate the risk
and the reward in a transaction. Generally, we define reward as the net spread expected to
be realized if the deal is completed by a certain date. We define risk as the expected return
upon deal breakup (typically a negative number) by a certain date. In the following sections,
we discuss methods for quantifying risk and reward.

Reward
The most widely used statistic in merger arbitrage is the trading spread, which is the
difference between what the acquirer is paying per target share and the per share price of
the target stock at a given time. The trading spread is easy to calculate; the calculation does
not depend on any assumptions about the expected completion date of the transaction, the
value of any dividends, cost of carrying a position, the expected value of any optionality in
the deal terms, and the risk in the transaction. Since the trading spread abstracts from these
important considerations, it is typically not very useful except as a point of reference in
trading.

Arbitrageurs sometimes refer to the net spread in a transaction. The term “net spread,”
however, is only useful if one knows what the spread is “net” of. In our experience, there is
variation in the way the net spread is defined across investors.

The most useful metric for quantifying reward in risk arbitrage is the difference between the
expected future value of the offer and the current price of the target stock. This value, which
we will refer to as the “net spread,” reflects the expected future monetary return (conditional
on deal closure) from a risk arbitrage position. When expressed as a ratio of the initial
capital committed per share of the target in a risk arbitrage position, this “percentage net
spread” captures the holding period expected rate of return, once again conditional on deal
consummation. The holding period in this case is synonymous with the time to completion of
the merger. Often, the percentage net spread is expressed on an annualized basis. The
annualized percentage net spread reflects the conditional expected return that the risk
arbitrage investment would have achieved over a 12-month period if the holding period
return could be sustained (or interpolated) over the year.

5
The conventional definition presumes that arbitrageurs have a long investment in the deal because they expects a “reward” if the deal is completed. For
arbitrageurs with a short position in the deal, the expected return upon deal completion (reward) is a proxy for risk, and the expected return upon deal
breakup (risk) is a proxy for reward.
March 8, 2002 3
Risk Arbitrage Research Bulletin

We define the net spread in the following manner:

Net Spread =

+ Expected value of the stock consideration at closing: This value is typically assumed
to be equal to the acquirer price multiplied by the exchange ratio.6 If there is a
collar in the transaction, the value of the stock consideration in the middle of the
collar is used.

+ Cash: The expected cash payment at the closing of the transaction.

+ Future value of target dividends expected to be received: This value requires an

assumption about the expected closing date of the transaction. The dividends are
accumulated from the payment date to the expected closing of the transaction at a
risk-free (or low risk, such as LIBOR) rate of return.

– Future value of acquirer dividends expected to be paid: The calculation is

analogous to that for the target dividends, except that the value of dividends has to
be multiplied by the exchange ratio.

+ Expected payoff from optionality at closing: When deal terms involve optionality, the
expected payoff at the closing of the transaction from the embedded options needs
to estimated. The expected payoff from the options requires assumptions about the
distribution of acquirer stock return to the closing of the transaction. A standard
option valuation model, such as the Black-Scholes model, may be used, with implied
volatilities typically derived from listed options of comparable maturity. Under risk-
neutral valuation of the Black-Scholes model, the expected future payoff is the value
of the options, accumulated to the closing of the transaction at a risk-free rate.7

+ Expected interest earnings on short proceeds: Interest earnings from the short
proceeds on the acquirer shares shorted per share of target stock, accumulated to
the expected closing of the transaction. A risk free (or low risk) rate of return, less a
spread that reflects the availability of stock to be shorted, the credit rating of the
investor and a compensation for the privilege of borrowing stock is used to calculate
the future value. If the availability of the acquirer stock to borrow is very limited, the
investor may actually have to put up capital rather than receive interest on short
proceeds.

– Target price.

As noted above, the percentage net spread is expressed relative to the capital committed in
the transaction. To simplify matters, we typically assume that this capital is equal to the value
of the target stock. In reality, the capital an investor puts up depends on the extent of leverage

6
With this assumption, we ignore the possibility that an alternative offer may emerge or that the terms of the offer would be improved. In calculating the value
of the stock consideration, we assume that arbitrageurs maintain their positions until the closing of the transaction, so that the stock received from the acquirer
offsets the short position in the acquirer stock. This is equivalent to assuming that the price target at the closing of the transaction is equal to the exchange ratio
times the acquirer price in a stock-for-stock transaction. When this condition fails, the calculation of the expected payoff would need to be based on an
assumption about the distribution of the acquirer stock return to the closing of the transaction.
7
In collar deals, investors often hedge themselves by entering option trades to extract the optionality in the terms. The objective is to guarantee a known
payoff conditional on deal completion. The cost or premium of the option trade would need to be included as part of the reward calculation in these
situations. The capital committed to the transaction needs to adjusted by the cost or the premium of the option trade. Calculation of the risk upon deal
termination would need to incorporate payoffs from the options at such time.

4 March 8, 2002
 Risk Arbitrage Research Bulletin

that he is able to employ. Under Regulation T, the investor would have to put up 50% of the
notional amounts on the long and the short sides of a transaction.

In our calculation of the net spread, we do not subtract the cost of funding the long position
because we assume that the investor puts up capital that is equal to the value of the target
stock. There is, however, an opportunity cost associated with the capital that is invested in the
risk arbitrage position. We typically assume that the investor could have invested this capital
in a risk-free (or low risk) asset. Since we do not subtract this implicit cost from the net spread,
our definition of reward reflects the opportunity cost of capital.

Risk
We define risk to be the expected monetary return conditional on deal termination.
Calculating this return is a subjective task and requires estimating the levels where the target
and acquirer prices would trade to if the deal were to be terminated. Part of this exercise is
estimating a counterfactual: where would the stock prices be in the absence of a deal at a
given time in the future? The second part is estimating the short-term impact of arbitrage
activity on stock prices at the time of deal termination. As arbitrageurs unwind their positions,
the sudden surge in buying and selling pressure may cause the target and acquirer prices to
deviate in the short term from counterfactual estimates.

Two of the most widely used methods for estimating counterfactual stock price levels are
technical and fundamental analysis. In general, the simplest methodology to implement on a
continuous basis is technical analysis. The first task is to identify a pre-announcement price
level for both the acquirer stock (in a stock deal) and the target stock. In cases where the
stock price exhibits low volatility prior to the announcement, an average price over a period
preceding such an announcement (or unconfirmed report) may be used. In cases where there
is a directional movement or high volatility in the stock price prior to the announcement, a
price level that reflects any recent fundamental news (prior to any unconfirmed reports) on the
company may be more relevant. Clearly, it is sometimes difficult to identify any news that
drives the price of a stock. In such situations, the best option may be to use the pre-
announcement price level under the presumption that it reflects all the relevant information in
the market.

Once an initial price level has been chosen, the next task is to adjust that price over time to
reflect changes in economic and industry conditions. One option is to use a CAPM model to
estimate the beta of the stock relative to a relevant market index over a period before the deal
announcement and use this estimated beta to predict the path of the stock price from the
announcement date to risk/reward analysis date.8 If a broad market index is used, even
though the stock may be part of the index, the effect of price changes in the stock will be
negligible within the index and the estimates will be unbiased. The shortcoming of using a
broad index is that the variation in the index returns is unlikely to explain much of the variation
in the stock returns. Consequently, the method may produce particularly unreliable results.
Using a narrow index, such as a sector index, may produce more reliable estimates, but are
likely to lead to biases to the extent that the stock is a significant component of the index.
Other shortcomings of the CAPM methodology are that the results rely on judgments about
data frequency and time horizon in the estimation of beta. Given such problems, we would
exercise caution in estimating counterfactual prices over long periods of time using this
methodology.

8
Beta is defined as the covariance between individual stock and market return divided by the variance of the market return.
March 8, 2002 5
Risk Arbitrage Research Bulletin

An alternative to technical analysis is fundamental analysis. This method requires an intimate

knowledge of the company, its comparables, industry, and market conditions. The
fundamental analyst would continue to value the company on a standalone basis using the
relevant valuation metrics. The arbitrageur would need access to such analysts to assess the
risk in a deal without having to rely purely on technical estimates. Especially in transactions
that take more than a few months to close, fundamental valuation becomes indispensable.

Estimating a counterfactual price level, however, may not be sufficient by itself. In a cash or a
stock deal where arbitrageurs are typically long the target stock, deal termination may result
in a large short-term selling pressure on the target stock. The target price may thus fall to levels
below the counterfactual estimate. In a stock deal where arbitrageurs are also short the
acquirer stock, deal termination may result in a high demand for the acquirer stock to cover
short positions, leading to an overshooting of the counterfactual estimate. Arbitrage price
impact may be estimated by studying the evolution of acquirer short interest and relating it to
acquirer trading volume. In cash only deals where short interest data is not relevant, the
arbitrageur may have to track the evolution of the target shareholder base and identify other
arbitrageurs who would be likely to unwind their positions as soon as the deal breaks up. In
practice, the low frequency of the shareholdings data may lead to misleading results.

Another method for estimating arbitrage impact is to calculate the change in the trading
volume of a target or acquirer stock over the early days of a deal relative to some average
trading volume prior to deal announcement. Assuming that a certain proportion of the shares
traded during these days end up in arbitrageurs’ hands, the estimated shares traded for
arbitrage positions can be compared with the trading volume at later stages in the transaction
to gauge potential price impact upon deal failure. Generally, a surge in the trading volume of
a low-liquidity stock is indicative of a fairly large price impact. For stocks that are heavily
traded on a daily basis, arbitrageur price impact is likely to be relatively low. The
shortcoming of this approach is that it ignores the possibility that arbitrageur s may accumulate
or unwind positions throughout the life of the deal.

Once we have estimates of the target and acquirer prices upon deal termination, we
calculate risk in the following manner:

Risk =

+ Expected return on the long position: This value is equal to estimated target price
upon deal termination less the current target price. If dividend payments are
expected before the time of termination, the estimated target price should reflect
such payments.

– Expected return on the short position: In stock deals, this value is equal to the
exchange ratio multiplied by the difference between the estimated acquirer price
upon deal termination multiplied by the current acquirer price. If dividend payments
are expected before the time of termination, the estimated acquirer price should
reflect such payments.

+ Future value of target dividends expected to be received: Same as in calculation of

the net spread.

– Future value of acquirer dividends expected to be paid: Same as in the calculation

of the net spread.

6 March 8, 2002
 Risk Arbitrage Research Bulletin

+ Expected interest earnings on short proceeds: Same as in calculation of the net

spread.

We typically assume that the deal termination date is the same as the expected closing date
for simplicity.9 If an earlier date is used, the gain or the loss may be accumulated to the
expected closing date at the risk-free rate.

Benchmark Probabilities
The benchmark deal completion probability can be derived from the equation stated
previously:

P(DC) = (risk-free return – risk) / (reward – risk)

Since this probability needs to lie between 0 and 1, there are certain restrictions on the
values of risk and reward can take for the risk/reward analysis under risk-neutrality to make
sense. For example, in the most usual case where reward is a positive number (gain) and risk
is a negative number (loss), the reward must exceed the risk-free (or low risk) return on capital.
Otherwise, it makes more sense to invest in the risk-free asset than to take a long position in
the risk arbitrage deal. Alternatively, the net spread is too “narrow” and does not belong in
the portfolio of a risk-neutral investor.10

The risk-free or low-risk return is obtained by multiplying the capital invested in the deal by the
risk-free rate of return to the expected closing date. The return reflects the opportunity cost of
capital committed in the transaction and therefore corresponds to the breakeven rate of return
for a risk-neutral investor.11

Given the subjectivity involved in the calculation of the net spread, there is likely to be some
variation across arbitrageurs in their estimation of the benchmark deal completion probability.
It would therefore be reasonable to assume that the benchmark probability lies within a range
around the point estimate. If the arbitrageur believes that the deal completion probability lies
above this benchmark range, he may initiate or increase his position in the deal.
Analogously, if the arbitrageur’s subjective probability lies below this range, he may take a
short position in the deal or unwind an existing position.

The benchmark probabilities will change over time to reflect changes in risk, reward, and
time. Assuming that risk estimates and the expected completion date remain constant, the
reward would decrease with the passage of time and the timely resolution of regulatory
hurdles. Consequently, the benchmark deal completion probability would increase over time,
given its inverse relationship to reward. If the deal faces serious regulatory issues, the reward
would also increase to compensate investors for the regulatory risk, resulting in a decrease in
the benchmark completion probability.

Comparing Deals?
Investors are sometimes tempted to compare annualized net spreads across transactions.
Without an assessment of the downside risk, such comparisons do not provide an acceptable

9
This assumption is reasonable, as most deals are likely to break up as time nears the expected completion date.
10
If the estimated risk is a positive number and exceeds the reward, the reward has to be less than the risk-free return.
11
Alternatively, we could incorporate the opportunity cost of capital directly into our calculation of risk and reward. In that case, the relevant breakeven rate of
return becomes zero. The calculation of benchmark probabilities is not affected by this change.
March 8, 2002 7
Risk Arbitrage Research Bulletin

basis for investment even for risk-neutral investors.12 In certain situations, benchmark
probabilities may help to compare the attractiveness of different deals. As an example,
consider the following two deals:

Figure 1: Risk/Reward and Annualized Spread

Deal Capital Reward Risk Expected Risk-free Annualized P(DC)
(Target Price) (Spread) Completion Return Net Spread
A $50 $4 -$4 1 year $2 8% 75.0%
B $50 $8 -$34 1 year $2 16% 85.7%
Source: Lehman Brothers

According to Figure 1, deal B has an annualized net spread that is twice that of deal A. Even
though the reward on deal B is higher than deal A, the estimated risk for deal B is also
considerably higher. The benchmark probability of completion for deal A is actually lower
than that of deal B. A risk-neutral investor who believes the deals have an equal probability of
completion, say 80%, should be willing to invest in deal A, but not deal B, despite the large
difference in the annualized net spread. As indicated above, risk-neutral investors would need
to compare the expected returns, which incorporate estimates of downside risk. The expected
return (based on the subjective 80% probability of deal completion) for deals A and B are
4.8% and -0.8%, respectively, making deal B clearly inferior to deal A for a risk-neutral
investor.

In this example, the comparison was aided by the assumption that the investor used the same
subjective completion probability and expected completion date for both deals. In using the
benchmark probabilities, investors have to keep in mind that (i) the estimated benchmark
probability needs to be compared with the investor’s subjective probability for the same deal,
(ii) benchmark probabilities are conditional on the anticipated completion/termination date of
a transaction. Hence, benchmark probabilities are not directly comparable across
transactions.

Comparison across deals may be possible if the investor groups a number of deals with the
same expected completion date and the subjective probability of closing. For a risk-neutral
investor, only deals with benchmark completion probabilities less than the subjective
probability may provide attractive long investment opportunities.

Sample Risk/Reward Analysis

The following is a simple risk/reward analysis of the Remedy (NASDAQ: RMDY)/Peregrine
(NASDAQ: PRGN) transaction as of July 20, 2001. While the transaction actually closed
on August 28, 2001, we present the analysis from the perspective of July 20, 2001.

On June 11, 2001, Peregrine Systems and Remedy Corp. announced that they entered into
a definitive agreement for Peregrine to acquire Remedy. Peregrine announced that it is
offering $9.00 in cash and 0.9065 PRGN shares for every share of RMDY.

We assume that investors put on the risk arbitrage spread as of the late afternoon in New
York on July 20, 2001, by shorting 0.9065 PRGN shares and purchasing one RMDY share.

12
In addition, the presumption that the holding period return for a transaction could be sustained over the course of a whole year may not be very realistic
when comparing a deal that is expected to close in a month to a deal that is expected to close in 12 months.

8 March 8, 2002
 Risk Arbitrage Research Bulletin

We assume that the interest rate on short proceeds (short rebate rate) is 3.75%, the
opportunity cost of capital is 3.9% (market term rate), and the expected completion date is
August 31, 2001 (in 42 days from July 20). Neither company pays dividends and there is
no optionality in the deal terms.

PRGN Upside Price Estimate: We assume that PRGN price remains at July 20, 2001 levels if
the deal goes through ($22.30), but rises to $25.56 if the deal breaks. This $25.56 level
corresponds to a one-month pre-announcement average PRGN price adjusted by the change
in the Nasdaq Composite index (-8.5%) since the deal announcement according to a beta of
1.29.

RMDY Downside Price Estimate: Suppose that Remedy closes at a zero spread, with a price
of $29.21 (= 0.9065 × $22.30 + $9.00) if the deal goes through, but decreases from the
current level ($28.65) to $17.08 if the deal breaks. The $17.08 level corresponds to the
one-month pre-announcement average RMDY price adjusted by the change in the Nasdaq
Composite index since the deal announcement (-8.5%) according to a beta of 0.99.

Reward: Risk arbitrage investors will capture $0.66 (= 0.9065 × $22.30 + $9.00 –
$28.65 + 3.75% × $22.30 × 42/365) if the deal goes through. The net spread consists of
the value of the cash and the stock expected to be received upon deal completion, the
expected interest on short proceeds to expected completion less the current target stock price.

Risk: If the deal breaks, investors will lose $11.57 (= $28.65 – $17.08) on their long RMDY
position, and lose $2.96 (= 0.9065 × [$25.56 – $22.30]) on their short PRGN position.
After taking short rebate into account, the total risk is a loss of $14.44.

Benchmark Deal Completion Probability: Putting on the risk arbitrage spread would be
worthwhile compared with a market term rate of 3.9% for investors who believe that the deal
success probability is 97% or higher.13 Figure 2 summarizes this analysis.

Figure 2: Risk/Reward Analysis

Deal Completion Deal Breakup
PRGN Price (Assumed) $22.30 $25.56
RMDY Price (Assumed) $29.21 $17.08
Reward-Risk $0.66 -$14.44
Benchmark Probability 97% 3%
Source: Lehman Brothers

Conclusion
The risk/reward analysis may be extended to incorporate other possible outcomes in a deal,
such as competing bids and renegotiations. As more possibilities are introduced into the
analysis, however, the level of complexity increases and benchmark probability calculations
become arbitrary as investors need to make assumptions about conditional probabilities with
respect to different contingencies.

We favor the use of risk/reward analysis in situations where the number of material
assumptions required in the calculations is minimal. We believe that the risk/reward analysis

13
Let P equal the probability of deal completion. We solve the following equation for P:
P × $0.66 + (1 – P) × (-$14.44) = $28.65 × 3.9% × (42/365).
March 8, 2002 9
Risk Arbitrage Research Bulletin

is an integral part of evaluating risk arbitrage deals and should be used in conjunction with
solid regulatory, fundamental, and legal analysis.

10 March 8, 2002
 Equity Derivatives and Quantitative Research

Global Head of Derivatives and Quantitative Research

Murali Ramaswami, Ph.D.............................. 1.212.526.0885 ............................. mramaswa@lehman.com

New York
Gabriela Baez ........................................................................................................ gbaez@lehman.com
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Alfredo A. Hernandez, Ph.D.................................................................................... alhernan@lehman.com
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Sugun V. Kapoor.................................................................................................. skapoor1@lehman.com
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London
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exchange rates, interest rates, or other factors. Past performance is not necessarily indicative of future results. If a product is income producing, part of the capital invested may be used to pay that income. Lehman Brothers may make a
market or deal as principal in the securities mentioned in this document or in options, futures, or other derivatives based thereon. In addition, Lehman Brothers, its shareholders, directors, officers and/or employees, may from time to time
have long or short positions in such securities or in options, futures, or other derivative instruments based thereon. One or more directors, officers, and/or employees of Lehman Brothers may be a director of the issuer of the securities
mentioned in this document. Lehman Brothers may have managed or co-managed a public offering of securities for any issuer mentioned in this document within the last three years, or may, from time to time, perform investment banking or
other services for, or solicit investment banking or other business from any company mentioned in this document.  2002 Lehman Brothers. All rights reserved.

Additional information is available on request. Please contact a Lehman Brothers’ entity in your home jurisdiction.