Strategy · Event-Driven

MERGER ARBITRAGE

NeutralDefined riskAdvanced

Overview

Buy the target stock after an announced acquisition at a discount to the deal price. Earn the spread between current price and deal close, typically 1-5%, on successful deals.

Setup

1.Wait for an announced cash or stock-and-cash deal.
2.Compute the implied spread: deal price minus current price, annualized to expected close date.
3.Verify regulatory and shareholder-approval risks are manageable.
4.Build a basket of 8-15 deals to diversify break risk.
5.Hold each position to deal close.
6.Avoid hostile or politically-charged deals (higher break probability).

Max profit

Annualized spread × notional; typical 5-10% annualized when actively managed.

Max loss

Deal-break risk: target stock can fall 20-40% if deal collapses.

Breakeven

Captured spreads exceed losses on broken deals.

When to use

As an absolute-return sleeve uncorrelated to broad market direction.

When to avoid

In high-break-rate environments (FTC scrutiny, antitrust crackdowns).