Feb. 2, 2021
Here is the article.
I like to read the article first, and then watch the video about hedge fund strategies: Merger arbitrage 1 a few more times.
A Successful Merger Example
Let's look at how a successful merger arbitrage deal works in practice.
Suppose Delicious Co. is trading at $40 per share when Hungry Co. comes along and bids $50 per share—a 25% premium. The stock of Delicious will immediately jump, but will likely soon settle at some price higher than $40 and less than $50 until the takeover deal is approved and closed.
Let's say that the deal is expected to close at $50 and Delicious stock is trading at $47. Seizing the price-gap opportunity, a risk arbitrageur would purchase Delicious at $48, pay a commission, hold on to the shares, and eventually sell them for the agreed $50 acquisition price once the merger is closed. From that part of the deal, the arbitrageur pockets a profit of $2 per share, or a 4% gain, less trading fees.
From the time that they are announced, mergers and acquisitions take about four months to complete. So, that 4% gain would translate into a 12% annualized return.
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