Hedge Fund
Introduction To Merger Arbitrage
March 2021 - Hedge Fund
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Introduction to Merger Arbitrage
What is Merger Arbitrage?
Merger arbitrage describes an active trading strategy that utilizes equities in an effort to capture the expected profit between the current market price and the value to be paid at the close of a publicly announced merger or acquisition.
When a publicly traded company is the target of a takeover, there is often a “spread” between the offer price (the price to be paid at closing by the acquirer) and the trading price immediately following the deal’s announcement.
Typically, the target company’s stock trades at a discount to the announced deal price. The discount results from:
1. the risk that the transaction will fail to close, and
2. the time value of money
A merger arbitrage strategy attempts to capture this spread to earn a consistent return stream. This strategy is typically employed by taking long positions in the stocks of companies that are the target of announced M&A transactions.
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