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Airgas Takeover Fight Disappoints Hedge Funds

Hedge funds have a big say in the Air Products–Airgas fight, enabling Airgas to get the best possible price.

On Wednesday, Airgas shareholders sent a clear message to management and the board of directors at the company’s annual meeting when they voted in favor of three directors nominated by Air Products and Chemicals, whose hostile bid to acquire Airgas has been rejected three times.

And quite a few of those disenchanted shareholders are hedge funds, most of whom piled into Airgas stock after Air Products made its initial $60-per-share bid for the company back in February.

Since then, Airgas — which claims to be the largest U.S. distributor of industrial, medical and specialty gases — has rejected two subsequent, higher offers, including last week’s $7.4 billion takeover bid, including assumed debt.

Shareholders, however, rejected a separate bylaw-amendment proposal sponsored by Air Products that would have moved up the 2011 annual meeting to this January. Airgas’s board of directors has staggered terms, so that would have made it possible for Air Products to unseat additional directors sooner. All four proxy advisory firms had recommended voting against the proposal, claiming it would limit “the board’s ability to negotiate the highest offer for shareholders.”

However, Institutional Shareholder Services had advised Airgas shareholders to vote for Air Products’ director slate. ISS also said that Air Products’ current $65.50 offer is a “compelling starting point for negotiation” and that “the burden now shifts to the ARG board” to engage in negotiation or to open a broader sale process to maximize shareholder value.

Many critics — including CNBC’s Jim Cramer — say Air Products, with its initial offering of $60 per share, took advantage of the bottom of the economic cycle to try to “steal” its rival while its stock was artificially down.

Some of the smartest money seemed to agree. Since the end of the year, Eric Mindich’s Eton Park has bought more than 6 million shares of Airgas, to become the company’s largest shareholder. Pentwater Capital Management, which specializes in merger arbitrage — buying the target of potential mergers and shorting the would-be buyer — and other event-driven strategies, has become the third-largest holder after buying more than 1.56 million shares in the second quarter.

In the second quarter, Paulson & Co. took an initial 1 million-share stake, making it the ninth-largest holder. Other top-ten shareholders include Halcyon Offshore Asset Management — which counts Airgas as its largest holding — OZ Management (eighth-largest holding) and Third Point (sixth-largest holding). GLG counts Airgas as its fifth-largest holding.

Here’s the irony: Most companies hate it when hedge funds, especially activists, pile into their stock, figuring they just want to make a fast buck and run. However, in this case, it seems that Air Products is determined to catch its prey eventually. So the hedge funds will probably enable Airgas to get the best possible price.

Stephen TaubStephen Taub , who has covered the hedge fund industry for 30 years, is a contributing editor to Institutional Investor and Absolute Return-Alpha magazines

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