The strategy of buying shares of an acquisition target after a takeover announcement at a discount to the deal price — profiting from the spread if the merger completes successfully.
Deeper Explanation
When a company announces an acquisition at, say, ₹100 per share, the target's stock typically rises to ₹95–97 — reflecting the probability that the deal completes. The merger arbitrageur buys at ₹96 and holds until deal completion at ₹100, earning the 4% spread. The risk: if the deal fails, the target stock typically falls back to its pre-announcement price (often 20–30% lower). Merger arb requires careful assessment of deal completion probability — regulatory approval, financing conditions, shareholder votes, and strategic rationale. The strategy is inherently positively skewed in good times and negatively skewed in crises — as deal failures cluster during market downturns.
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