Merger Arbitrage

What is 'Merger Arbitrage'

Merger arbitrage is 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.

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RELATED FAQS
  1. How can I develop a profitable merger arbitrage strategy?

    Learn how to utilize a simple merger arbitrage trading strategy to profit from the typical temporary price discrepancies ... Read Answer >>
  2. How long does it take for a merger to go through?

    Corporate mergers and acquisitions can vary considerably in the time they take to be completed. There are a number of individual ... Read Answer >>
  3. How does a merger affect the shareholders?

    Explore the effect of a merger and understand how the process affects shareholders of the newly merged firm in terms of stock ... Read Answer >>
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    Learn about the difference between mergers and acquisitions. Discover what factors may encourage a company to merge or acquire ... Read Answer >>
  5. Why are the terms 'merger' and 'acquisition' always used together if they describe ...

    Learn about mergers and acquisitions and how these two corporate actions differ based on the size and participation of the ... Read Answer >>
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    Read about the legal and practical differences between a corporate merger and corporate acquisition, two terms often used ... Read Answer >>
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