M&A arbitrage is a way to profit from one company taking over another, or two firms deciding to merge. Both events are usually good for the share price of a target (in an acquisition) or smaller firm (in a merger), but bad for the predator, or larger firm.
That’s because most investors assume the acquiring firm will pay a premium that will never be recovered in future cost savings or other synergies. So a trader, sensing a forthcoming bid, might buy (‘go long’) the target and sell (or ‘short’) the predator using, say, two spread bets.
If the predator’s shares duly fall and the target’s rise, the bet makes money. However, should the proposed deal collapse, the trade must be closed quickly to avoid big losses.