Risk arbitrage

Risk Arbitrage (English: risk arbitrage or merger arbitrage ) is a trading or investment strategy in which an investor tries to exploit the usually positive price difference between offer price and share price at the public company takeovers. This characteristic difference in price reflects the probability of failure of the transaction, the time value of money and the possibility of supply adjustments.

For acquisitions publicly traded companies the acquiring company money as well as treasury shares can offer. Often, the shares of the takeover target trading below the offer, ie the market price is lower than the price offered. Here arises for the dealer an opportunity of arbitrage because it cheap acquires the shares prior to the implementation of the takeover and then sold on the acquisition date at the offer price again.

While in a pure cash offer the arbitrageur buys the stock only and waits until the transfer is made is the risk arbitrage designed a little more complicated in a share swap. Here the acquiring company offers its own shares at a specific reference ratio for the shares to the target company. An arbitrageur can now shares of the acquiring company sell short (short sell, possess for sale of shares without it) and shares of the takeover target buy ( setting the spread). During the transfer then the shares of the takeover target are exchanged for the shares of the transferee and the short sale is closed out ( balanced ).

The risk of such a strategy is based on the fact that not all acquisitions as originally planned, or published, vonstattengehen. In the case of antitrust concerns, the competent competition authority may delay the transaction or even prevent. Similarly, the acquisition of the lack of agreement of the parties or of the shareholders fail. The arbitrageur must, however, provide in each case either interest on the invested capital raise ( cash transaction ) or sold short shares. This risk also justified the possible difference between the bid and the market price.