Merger Arbitrage


DEFINITION of 'Merger Arbitrage'

A hedge fund strategy in which the stocks of two merging companies are simultaneously bought and sold to create a riskless profit. A merger arbitrageur looks at the risk that the merger deal will not close on time, or at all. Because of this slight uncertainty, the target company's stock will typically sell at a discount to the price that the combined company will have when the merger is closed. This discrepancy is the arbitrageur's profit.

BREAKING DOWN 'Merger Arbitrage'

A regular portfolio manager may focus only on the profitability of the merged entity. In contrast, merger arbitrageurs care only about the probability of the deal being approved and how long it will take the deal to close.

  1. Hedge Fund

    An aggressively managed portfolio of investments that uses leveraged, ...
  2. Acquisition

    A corporate action in which a company buys most, if not all, ...
  3. Strategic Buyer

    A type of buyer in an acquisition that has a specific reason ...
  4. Merger

    The combining of two or more companies, generally by offering ...
  5. Arbitrage

    The simultaneous purchase and sale of an asset in order to profit ...
  6. Market Arbitrage

    Purchasing and selling the same security at the same time in ...
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  1. Are there mutual funds that take advantage of merger arbitrage?

    A few select mutual funds focus investing on merger arbitrage. Among these are the Merger Fund, the Arbitrage Fund and the ... Read Full Answer >>
  2. How can I develop a profitable merger arbitrage strategy?

    Traders can implement a merger arbitrage trading strategy by buying the stock of the target company involved in the merger, ... Read Full Answer >>
  3. Can hedge funds trade penny stocks?

    Hedge funds can trade penny stocks. In fact, hedge funds can trade in just about any type of security, including medium- ... Read Full Answer >>
  4. Are hedge funds regulated by FINRA?

    Alternative investment vehicles such as hedge funds offer investors a wider range of possibilities due to certain exceptions ... Read Full Answer >>
  5. Should mutual funds be subject to more regulation?

    Mutual funds, when compared to other types of pooled investments such as hedge funds, have very strict regulations. In fact, ... Read Full Answer >>
  6. Can hedge fund returns be replicated?

    You can replicate hedge fund returns to a degree but not perfectly. Most replication strategies underperform hedge funds ... Read Full Answer >>

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