Risk Arbitrage
An event-driven strategy that profits from the spread between a target company's stock price and an announced deal price.
What is Risk Arbitrage?
Risk arbitrage, also known as merger arbitrage, is an investment strategy that seeks to profit from the price spread between a takeover target's current market price and the announced acquisition price. When a merger is announced, the target company's stock typically rises toward—but not to—the deal price, with the remaining gap reflecting the probability that the deal will not close and the time value of money. Arbitrageurs buy the target stock and often simultaneously short the acquirer's shares, earning the spread if the deal closes as announced. The 'risk' refers to the possibility that the deal collapses due to regulatory rejection, financing failure, or shareholder disapproval, which would cause the spread to widen sharply and generate losses. Risk arbitrage is typically practiced by hedge funds with specialist expertise in regulatory, legal, and deal-structure analysis.
Example
When Microsoft announced its $69 billion acquisition of Activision Blizzard at $95 per share in January 2022, risk arbitrageurs bought Activision shares trading at a discount to the deal price. Funds that held positions through the extended regulatory review and the deal's eventual closure in October 2023 captured the spread as profit.
Source: Investopedia — Risk Arbitrage