Merger arbitrage, also known as risk arbitrage, is an investment strategy that aims to generate profits from successfully completed mergers and/or takeovers ¹. Here are some key points about merger arbitrage:

*How it Works:*

- Buying the stock of a company being acquired

- Selling the stock of the acquirer

*Role:*

- Arbitrageurs (investors who employ merger arbitrage strategies) play a crucial role in shaping the outcome of a merger

- They often make large financial investments based on the speculation that the merger will be successfully completed

- Once they are financially invested, they will do everything in their power to ensure that the merger goes through

*Types of Mergers:*

- Cash mergers: acquirer offers to pay a certain amount of cash (at a premium) for shares of the target company

- Stock-for-stock mergers: acquirer offers to purchase the shares of the target company by offering some of its own shares to the target company’s shareholders

*Arbitrage Spread:*

- The difference between the price at which the arbitrageur purchases the share and the acquisition price

- Also known as "going long" on the target company’s stock, based on the expectation that the share price will rise as the merger comes to a close

*Active and Passive Arbitrage:*

- Active arbitrage: arbitrageur holds enough stock in the target company to influence the outcome of the merger

- Passive arbitrage: arbitrageurs are not in the position to influence the merger – they make investments based on the probability of success (and the degree of hostility), and size up their investments when this probability increases