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.

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.

Recommended

Resource curse
Glossary

Resource curse

The term “resource curse” refers to the observation that countries with abundant natural resources also tend to be less economically developed than th…
14 Jan 2021
Balance of payments
Glossary

Balance of payments

The balance of payments refers to the accounts that sum up a country's financial position relative to other countries.
8 Jan 2021
Yield-curve control
Glossary

Yield-curve control

Yield-curve control is when a central bank aims to control long-term interest rates by pledging to buy (or sell) as many long-term bonds as needed to …
25 Dec 2020
Intangible assets
Glossary

Intangible assets

An intangible asset is anything that a company owns that isn’t physical.
25 Sep 2020

Most Popular

Prepare for the end of the epic bubble in US stocks
US stockmarkets

Prepare for the end of the epic bubble in US stocks

US stocks are as expensive as they’ve ever been. How can you prepare your portfolio for a bubble bursting?
18 Jan 2021
Bitcoin: fool’s gold or the new gold?
Bitcoin

Bitcoin: fool’s gold or the new gold?

With bitcoin hitting new highs last week, and close to becoming a mainstream investment, is it really gold for the 21st century?
15 Jan 2021
It's not just the UK – we're seeing pandemic housing booms across the globe
Property

It's not just the UK – we're seeing pandemic housing booms across the globe

Soaring house prices aren’t just a UK thing, they’re a worldwide phenomenon. And it’s no coincidence – the underlying cause is much the same. John Ste…
18 Jan 2021