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M&A arbitrage

M&A arbitrage is a way to profit from one company taking over another, or two firms deciding to merge.

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.

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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.

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