Reducing Market Risk With Merger Arbitrage
- Topics:
- Commercial Lending
- Tags:
- Finance,
- Investment,
- Magnum Global Investments,
- Merger,
- Merger Arbitrage Return,
- Mergers & Acquisitions,
- Risk,
- Stock
- Source:
- Magnum Global Investments
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Overview: After a company announces intent to acquire another, the price of the target company's stock predictably goes up, although usually not to the full offering price. Instead, because of the risk of the deal not closing on time or at all, the target company's stock will sell at a discount to its value at the merger's closing, this discount increasing with the expected length of time until closing and the perceived risk of the deal. Merger arbitrage returns are largely uncorrelated to the overall movement of the stock market, and the risks are much more managed because the article is talking about anticipating probable outcomes of specific transactions versus predicting what are often far more random variables when making directional investments. Merger arbitrage, also referred to as risk arbitrage, is a relatively new hedging strategy. Sometimes categorized as one of the market-neutral hedging strategies that have emerged in recent years, merger arbitrage, though little correlated to the market, is not truly market neutral, as we have seen that market downturns can sometimes disrupt the outcome of agreed deals.
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Format: HTML | Date: Jan 2003 | Pages: 1
