Special Situations - Graham's Approach to Workouts

Graham's framing

"The prime requisite for success in this field is the ability to estimate future developments with some approximation of accuracy." - Security Analysis, Special Situations
"Operations of this type resemble in many respects the customary business operations of an enterprise rather than the taking of a speculative position in the market." - Security Analysis, Special Situations

Workouts are business-like: you underwrite terms, timing, and downside, not broad price moves.

Common situations

• Liquidations and breakups.
• Tender offers and Dutch auctions.
• Mergers and appraisal plays.
• Recapitalizations and spin-offs.

How to evaluate

• Terms: Cash vs. stock consideration, collar mechanics, proration.
• Timing: Expected close; regulatory/financing conditions.
• Downside: Standalone value if deal breaks; balance sheet strength.
• Probability: What must go right; who bears the risk.

Risk controls

• Diversify across multiple events to avoid single-deal blowups.
• Avoid leverage; forced liquidation risk kills the strategy.
• Size by downside, not by headline spread.
• Prefer cash deals with few conditions; penalize heavy financing/regulatory risk.

Quick checklist

• What is the base value if the deal fails?
• What conditions can delay or break the deal?
• Who has committed financing or approvals?
• What is my expected IRR after timing adjustments?
• How much of my capital is already in similar-event risk?

Takeaways

• Special situations can be investments when terms, timing, and downside are concrete.
• Treat them as business underwritings, not market forecasts.
• Diversify events, avoid leverage, and demand a margin of safety in both price and probability.