Risk arbitrage
Risk arbitrage ( English arbitrage risk or English merger arbitrage ) is a trade - or investment strategy in which an investor tried, usually positive price differential between offer price and stock price for public acquisitions exploit. This characteristic price difference reflects the likelihood of failure of the transaction, the time value of money, and the possibility of supply adjustments.
General
If a merger or a company acquisition becomes known on the financial markets , price reactions occur immediately. In takeovers publicly traded company , the acquiring company can both money and own shares offer. Often the shares of the takeover target are listed below the offer, i. H. the market price is lower than the price offered. This gives the stock market trader an opportunity to arbitrage because he can acquire the share cheaply before the takeover and then sell it again at the offer price at the time of takeover.
procedure
While the arbitrageur only buys the share in a pure cash offer and waits for the takeover to take place, the risk arbitrage is a little more complex in the case of a share swap . Here the company taking over offers its own shares in a certain subscription ratio for shares in the company to be taken over. An arbitrageur can now shares of the acquiring company sell short ( english short sell , sell shares without owning them at the time of sale) and shares of the takeover target buy ( english setting the spread ). When taking over the shares of the takeover target are then exchanged for the shares of the transferee and the short sale is closed out (balanced).
economic aspects
The risk of such a strategy is based on the fact that not all takeovers go ahead as originally planned or published. In the event of antitrust concerns, the competent competition authority can delay or even prevent the transaction. The takeover can also fail due to a lack of agreement between the companies involved or the shareholders. In any case, the arbitrageur must either pay interest on the invested capital (cash takeover) or deliver the stocks that have been sold short. This risk also constitutes the possible difference between the takeover offer and the stock exchange price.
literature
- Guy Wyser-Pratte (1971): Risk arbitrage , New York University, Institute of Finance
- Guy Wyser-Pratte (1982): Risk Arbitrage II: An Update , New York Univ Stern School of Business, ISBN 9-99390-423-6