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Merger Options and Risk Arbitrage

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Merger Options and Risk Arbitrage

Federal Reserve Bank of New York,

5 min read
5 take-aways
Audio & text

What's inside?

A targeted company’s options and stock pricing can reveal a great deal about the final outcome of a mergers and acquisitions deal.

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Editorial Rating

7

Qualities

  • Analytical
  • Innovative
  • Scientific

Recommendation

Mergers and acquisitions of publicly traded companies are commonplace on Wall Street, however, not all deals make their way to the finish line. Many fall flat due to regulatory hurdles, financing complexities or valuation issues. Hedge fund managers and specialist traders use merger arbitrage to generate a profit based on the risk of a deal ultimately closing. Investors and analysts gauging the predictability of a corporate M&A success may find clues imbedded in the prices of the targeted stock as well as of its options, according to economist Peter Van Tassel, who pioneers the study of merger arbitrage in this heavily technical analysis. getAbstract suggests this advanced report on the nuances of M&A pricing and outcomes to trading specialists.

Summary

Mergers and acquisitions of publicly traded companies have targeted implications for the firms involved, but more broadly, M&A transactions can affect the economy as a whole, functioning as a means of capital allocation and a driver of growth. Yet once announced, M&A deals are not a foregone conclusion. Multiple studies have found that some 20% of stated M&A activity never comes to fruition. Hedge fund managers and investors can realize outsized profits or significant losses by forecasting the success or failure of company tie-ups. Interestingly, the movement...

About the Author

Peter Van Tassel is a financial economist at the Federal Reserve Bank of New York.

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