Merger Arbitrage
Categories: Banking, Entrepreneur
Whatever.com was trading for $42 a share. They agreed to buy whoever.com for $23 a share, all in stock. In typical fashion for these kinds of mergers, the shares of the acuiree go up...the shares of the acquirer go down. The shares of whoever.com were trading for $17 last week, so this was a big premium paid by whatever.com...and a lot of investors don't trust that the deal will close. There are board politics, regulators, and distribution deals that all have to be worked out before the deal is closed officially. So at the moment, as the news has just been announced, shares of whoever.com are trading for just $21.42 a share. There's $1.58 in doubt that this deal will happen. There's also risk that whatever.com's shares at $42 a share will go down when their shares start trading.
Regardless, there is a spread of uncertainty between when the deal closes and now. If an investor were certain that the deal would close, then they would "arbitrage" the spread, shorting shares of whatever.com and being long shares of whoever.com, earning the "uncertainty gap" as the deal gets closer to closing, and more...certain.