Merger Arbitrage
An investment strategy that profits from the price spread between a target stock's trading price and the announced acquisition price.
What is Merger Arbitrage?
Merger arbitrage (also called risk arbitrage) is an event-driven investment strategy that seeks to capture the spread between a target company's current market price and the consideration offered in an announced merger or acquisition. After announcement, the target's stock typically rises toward—but not to—the offer price, with the remaining spread reflecting deal completion risk, time value, and regulatory uncertainty. Arbitrageurs buy the target's shares (and may short the acquirer's shares in stock deals) and profit if the deal closes at the announced terms. The annualized return on the spread compensates for the probability-weighted risk of deal failure. Spreads widen when antitrust risk is elevated, financing contingencies exist, or competing bids are possible.
Example
When Microsoft announced its $95.00 per share cash acquisition of Activision Blizzard in January 2022, Activision's stock jumped from approximately $65 to around $82—a significant increase but still approximately $13 below the offer price. Merger arbitrage funds purchased Activision shares at approximately $82, accepting a ~$13 spread over 20 months as compensation for regulatory and completion risk. The deal faced extended Federal Trade Commission and UK CMA scrutiny, widening the spread at various points to over $20 before ultimately closing in October 2023.
Source: SEC EDGAR — Corporate Filings