Merger Arbitrage

AAA

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.

INVESTOPEDIA EXPLAINS '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.

RELATED TERMS
  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. Arbitrage

    The simultaneous purchase and sale of an asset in order to profit ...
  5. Negative Arbitrage

    The opportunity lost when municipal bond issuers assume proceeds ...
  6. Market Arbitrage

    Purchasing and selling the same security at the same time in ...
RELATED FAQS
  1. 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 >>
  2. How can I use a regression to see the correlation between prices and interest rates?

    In statistics, regression analysis is a widely used technique to uncover relationships among variables and determine whether ... Read Full Answer >>
  3. How is a tender offer used by an individual, group or company seeking to purchase ...

    A tender offer is made directly to shareholders in a publicly traded company to gain enough shares to force a sale of the ... Read Full Answer >>
  4. How does a company record profits using the equity method?

    A company that invests in another company and has majority control of it would record profits using the equity method. This ... Read Full Answer >>
  5. Which federal regulatory agencies approved and are now responsible for enforcing ...

    Five federal regulatory agencies approved and are jointly responsible for enforcing the Volcker rule. These agencies include ... Read Full Answer >>
  6. What is the purpose of the Volcker Rule?

    The Volcker rule limits two main types of activities by large institutional banks. Banks are prohibited from engaging in ... Read Full Answer >>
Related Articles
  1. Investing Basics

    Investment Strategies For Volatile Markets

    Read on to learn some investment strategies when the volatility is high.
  2. Options & Futures

    Trading The Odds With Arbitrage

    Profiting from arbitrage is not only for market makers - retail traders can find opportunity in risk arbitrage.
  3. Options & Futures

    Alternative Assets For Average Investors

    These investments can add a new level of diversification to your portfolio.
  4. Options & Futures

    Hedge Funds: Higher Returns Or Just High Fees?

    Discover the advantages and pitfalls of hedge funds and the questions to ask when choosing one.
  5. Options & Futures

    Hedge Funds Hunt For Upside, Regardless Of The Market

    Hedge funds seek positive absolute returns, and engage in aggressive strategies to make this happen.
  6. Active Trading Fundamentals

    Trade Takeover Stocks With Merger Arbitrage

    This high-risk strategy attempts to profit from price discrepancies that arise during acquisitions.
  7. Options & Futures

    The Basics Of Mergers And Acquisitions

    Learn what corporate restructuring is, why companies do it and why it sometimes doesn't work.
  8. Trading Systems & Software

    The Fast-Paced World of Libor & Fixed Income Arbitrage

    LIBOR is an essential part of implementing the swap spread arbitrage strategy for fixed income arbitrage. Here is a step-by-step explanation of how it works.
  9. Personal Finance

    Financial Tips For People Who Hate Finance

    For people who hate financial planning, there's usually one big problem – which you can fix. Do it now.
  10. Investing

    Seven Investing Books For Your Summer Reading List

    It’s almost 4th of July, the season of summer reading. Picking up a book during your holiday can be a great opportunity to learn more investing.

You May Also Like

Hot Definitions
  1. Radner Equilibrium

    A theory suggesting that if economic decision makers have unlimited computational capacity for choice among strategies, then ...
  2. Inbound Cash Flow

    Any currency that a company or individual receives through conducting a transaction with another party. Inbound cash flow ...
  3. Social Security

    A United States federal program of social insurance and benefits developed in 1935. The Social Security program's benefits ...
  4. American Dream

    The belief that anyone, regardless of where they were born or what class they were born into, can attain their own version ...
  5. Multicurrency Note Facility

    A credit facility that finances short- to medium-term Euro notes. Multicurrency note facilities are denominated in many currencies. ...
  6. National Currency

    The currency or legal tender issued by a nation's central bank or monetary authority. The national currency of a nation is ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!