An event-driven strategy is a type of investment strategy that attempts to take advantage of temporary stock mispricing that can occur before or after a corporate event takes place. The strategy is most often used by private equity or hedge funds due to a large amount of expertise necessary in analyzing corporate events to execute the strategy successfully. The corporate event in question can include restructurings, mergers/acquisitions, bankruptcy, spin-offs, takeovers, and others. An event-driven strategy exploits the tendency of a company's stock price to suffer during a period of change.
Breaking Down Event Driven Strategy
Event-driven strategies have multiple methods of execution. In all situations, the goal of the investor is to take advantage of temporary mispricings caused by a corporate reorganization, restructuring, merger, acquisition, bankruptcy, or another major event. Investors who use an event-driven strategy employ teams of specialists who are experts in analyzing corporate actions and determining the effect of the action on a company's stock price. This analysis includes, among other things, a look at the current regulatory environment, possible synergies from mergers or acquisitions, and a new price target after the action has taken place. A decision is then made about how to invest based on the current stock price versus the likely price of the stock after the action takes place. If the analysis is correct, the strategy will likely make money. If the analysis is incorrect, the strategy may lose money.
Example of an Event Driven Strategy
For example, when an acquisition is announced, the stock price of the target company will often rise. A skilled analyst team will judge whether or not the acquisition is likely to occur based on the regulatory environment. If the acquisition does not happen, the price of the stock may suffer. The analyst team will then decide the likely landing place of the stock price if the acquisition happens based on a careful analysis of the target and acquiring companies. If there is enough potential for upside, the investor may buy shares of the target company to sell after the corporate action is complete and the target company's stock price adjusts.