Merger Arbitrage
An event-driven strategy that captures the spread between an announced acquisition price and the current market price of the target, profiting if the deal closes and absorbing the loss if it breaks.
Details
- aliases: Risk Arbitrage, M&A Arb
- category: event-driven
- parent strategy: event-driven
- investment thesis: Announced deals trade at a discount to the offer price reflecting deal-completion risk, time value, and financing risk. A diversified book of well-screened deals earns a relatively stable insurance-like premium.
- edge source: Legal and antitrust analysis, deal mechanics, regulatory expertise, and disciplined sizing of break-risk.
- typical holding period: 1-9 months
- drawdown profile: Negative-skew; long stretches of grinding gains punctuated by occasional sharp losses on broken deals.
- correlation to equities: 0.3
- correlation to bonds: 0.05
- liquidity profile: monthly
- instruments used: common stock, options, credit, preferred shares
- asset classes: equities, credit
- primary risks: deal-break risk, antitrust intervention, financing risk, shareholder vote, FX (cross-border deals)
- key metrics: deal close rate, annualized spread, loss-given-break, deal concentration
- notable practitioners: Ivan Boesky (historical), John Paulson, Daniel Loeb (Third Point), Pentwater
- exemplar funds: pentwater, merrill-lynch-arb-historic
- related terms: arbitrage, event-driven, antitrust, tender-offer
- related strategies: event-driven, special-situations, convertible-arbitrage
- academic foundations: Mitchell & Pulvino (2001) — Characteristics of Risk and Return in Risk Arbitrage