Takeovers, freezeouts, and risk arbitrage armando gomes. Merger arbitrage mondays willis towers watson and aon plc combine in an all stock deal. Merger arbitrage is possible since a target firms stock will probably not reach the offer price until the deal is finalized and the stock is delisted. Risk arbitrage is also known as statistical arbitrage. Merger arbitrage can produce a steady stream of profits for you. In this article, we present, for the first time, a method for determining the value of the minority stock and the freezeout option. Because of the reasonably high probability that risk arbitrage offers traders, experts generally consider it to be playing the odds. Request pdf limited arbitrage in mergers and acquisitions a diversified portfolio of risk arbitrage positions produces an abnormal return of 0. Originally published in 1971, risk arbitrage is the classic text on arbitrage strategies.
Squeezeout procedures can overcome this freeriding dilemma by allowing a buyer to enforce a payout of minority shareholders and seize complete control of the target firm. They are also usually hedged by taking short positions in the acquirers stock. Here are the things that will drive a risk arbitrage spread for a stock deal. Takeover arbitrage financial definition of takeover arbitrage. Risk arbitrage in emerging markets semantic scholar. Risk arbitrage in takeovers, cepr discussion papers 2026, c. Risk arbitrage and the information content of hedge fund trading abstract we study the implementation of risk or merger arbitrage by hedge funds and other institutional arbitrageurs, and document the increasing role that arbitrageurs have in the takeover process. Raymond is a financial analyst at electronic data systems, dallas. A reverse takeover or reverse merger takeover is the acquisition of a public company by a private company so that the private company can bypass the. To sum up this is a very competitive investment field with strong downside risk possibilities so. We show that trading allows for the entry of arbitrageurs with large blocks of shares who can hold out a freezeout a threat that forces the bidder to offer a high preemptive bid.
Modern risk arbitrage focuses on capturing the spreads between the market value of an announced takeover target and the eventual price at which the acquirer will buy the targets shares. Risk arbitrage in takeovers london business school. Limited arbitrage in mergers and acquisitions request pdf. The energy risk awards recognise the leading firms in energy risk management. The chapters in the collection are theoretically and empirically informed and clearly advance our understanding of takeover regulation in multiple asian jurisdictions. Takeovers, shareholder litigation, and the freeriding. Section 3 describes the data and presents empirical results.
Why higher takeover premia protect minority shareholders, journal of political economy, university of chicago press, vol. An investors guide frontiers in finance series by moore, keith m. Market risk exposure of merger arbitrage in australia. It is different from pure arbitrage as it involves risk or speculation. Arbitrage risk and the booktomarket anomaly sciencedirect. A brief guide to merger arbitrage vintage value investing. The resurgence in canadian merger and acquisition activity in the last few years has rekindled interest in the profitability of risk arbitrage as a strategy for canadas institutional investment community. An arbitrage condition is a relationship that must prevail between certain prices if they are to be arbitragefree. Merger activity decreased last week with three new deals announced and four deals closing and one deal terminated. Founded in 1828, willis towers watson public limited company wltw is a leading global advisory, broking and. Abstract this paper develops a dynamic model of tender offers in which there is trading on the targets shares during the takeover, and bidders can freeze out target shareholders.
Risk arbitrage is the definitive guide to the field and features a comprehensive overview of the theory, techniques, and tools that traders and risk managers need to be effective. This helps us to provide you with a good user experience and also allows us to improve our website. In bull markets, it could be a drag on performance. Risk arbitrage, also known as merger arbitrage, is an investment strategy that speculates on the successful completion of mergers and acquisitions. John paulson on the risk in risk arbitrage market folly. The paper studies the role of risk arbitrage in takeover contests. Request pdf limited arbitrage in mergers and acquisitions a diversified. After a tender offer, the trading volume increases dramatically in large part because of risk arbitrageurs activity. The asia risk awards return in 2020 to recognise best practice in risk management and derivatives use by banks and financial institutions around the region.
Practitioners will be interested in the trading risk of high frequency arbitrage as high frequency trading is quickly becoming an important part todays. Merger arbitrage, also commonly known as risk arbitrage, is the investment. This means that if the arbitrage technique is applied properly, you will make a profit no matter which way the underlying asset moves. Arbitrage, the simultaneous purchase in one market and sale in another of a security or commodity in hope of making a profit on price differences in the differe insider trading, insider trading refers to the buying or selling of a companys securities financial holdings, such as stocks, bonds, and mutual funds by a company risk management, risk management is a systematic process of. Takeovers, freezeouts, and risk arbitrage armando gomes july 2012 abstract this paper develops a dynamic model of tender o. This paper develops a dynamic model of tender offers in which there is trading on the targetjs shares during the takeover, and bidders can freeze out. Risk arbitrage and the information content of hedge fund. Foucault, kozhan, and tham 2017 model arbitrage opportunities to arise exogenously either due to demand or information shocks.
Keywords risk arbitrage, merger arbitrage, nordic markets, takeover suc. It is also far more accessible to retail traders than real arbitrage. In the book, john paulson writes that simply, the risk in risk arbitrage is therefore anything that affects the deals completion, the timing of completion, or the amount of consideration received at completion. In each case, it was shown that freeriding can be resolved without exclusion, but that outcomes without ex. Risk arbitrage financial definition of risk arbitrage. This is particularly important in merger arbitrage, where deal failure is a key risk. I know there are some recommended books out there like risk arbitrage wiley investment classics by guy wyserpratte. An investors guide is the first systematic attempt to break the silence around the secrets of the investment and trading strategy that exploits these corporate restructurings. This adds a layer of complication to the process and also some risk factors we need to consider. But how arbitrage a ects other measures of market quality, in particular market liquidity, is less well understood. Takeovers, freezeouts, and risk arbitrage armando gomes university of pennsylvania. Uk evidence on the merger arbitrage riskreturn15jan07.
This website uses cookies to distinguish you from other users. The value of the freezeout option is important in many legal policy issues concerning corporate law. Brown is assistant professor at the graduate school of business, university of texas at austin. Risk arbitrage was used often by warren buffett early in his career. Arbitrage enforces the law of one price and thereby improves the informational e ciency of the market. It is well known that risk arbitrageurs play an important role in the market for corporate control. Takeovers, freezeouts, and risk arbitrage semantic scholar. G00, g12, g34 abstract option prices embed predictive content for the outcomes of pending mergers and acquisitions. The study of risk involving high frequency arbitrage can be important for practitioners and policy makers. Arbitrage has existed for as long as the capital market has and futures arbitrage is a way of taking. Credit and risk arbitrage opportunities for institutional use only tsf1650tmgax1109 annualized returns 1 year 3 years 5 years 10 years analysis period hfri merger arbitrage index 6. We investigate the riskreturn characteristics of merger arbitrage in the australian market for corporate control, whereby hedge fund managers acquire companies subject to a takeover offer. When shareholders of a target firm expect a value improving takeover to be successful, they are individually better off not tendering their shares to the buyer and the takeover potentially fails. This new edition is completely updated and fully revised to reflect the changes to laws and technology and includes new case.
Attracted by the high rewards, many investment banks started new arbitrage departments and more people became involved in this activity. Written by leading activist fund manager guy wyserpratte, also known as the dean of the arbitrage community, this book provides an unparalleled overview of risk arbitrage. A credit suisse index puts the yeartodate return at around 4 percent, and an industry analyst estimates that it will end the year at as much as 7 percent a decent return for an investment that usually takes less than a year to come to fruition. Risk arbitrage used to be a very inconspicuous activity, but in the mid1970s, with the emergence of ivan boesky and the increasing volume of corporate takeover deals, it became more visible see welles 1981. Takeovers, freezeouts, and risk arbitrage by armando r. The activity of risk arbitrage detailed in this report is focused on capturing the spread between the current quote on the stock exchange, and the price that the final completion of the arbitrage activity will bring to the investor. Determinants and implications of arbitrage holdings in acquisitions pdf. Risk arbitrage traditionally, the simultaneous purchase of stock in a company being acquired and the sale of stock of the acquirer. Risk arbitrage an investment strategy to profit from the narrowing of a gap of the trading price of a targets stock and the acquirers valuation of that stock in an intended takeover deal. This is due to the risk of the merger not going through, and this risk makes merger arbitrage a somewhat risky form of arbitrage. At any time the risk arbitrage report affiliates my maintain long or short positions in the securities listed in this report. Comparative takeover regulation edited by umakanth varottil. But in market declines, its a hedge against declining stock prices.
An investor that employs this strategy is known as an arbitrageur. Risk arbitrage and the prediction of successful corporate. It is a strategy where the investor must determine the risk of a deal being completed and then buy the stock after a deal is. Futures arbitrage, are riskfree arbitrage techniques which returns a profit without any directional risk. His chapter on the subject begins by sharing advice from a risk arbitrage veteran with over 40 years of experience. Neither the risk arbitrage report nor intrinsicedge is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein.
The definitive guide to risk arbitrage, fully updated with new laws, cases, and techniques. Risk arbitrage and the prediction of successful corporate takeovers keith c. Thus, the risk and return characteristics of fixedincome arbitrage appear different from those of other strategies such as. Mitchell and pulvino 2001 find that risk arbitrage losses in a down market are positively related to the probability of merger failure. In most cases, however, the returns on risk arbitrage are modest and steady unless a deal falls apart. Risk arbitrage is a type of eventdriven investing in that it attempts to exploit pricing inefficiencies caused by a corporate event. Merger options and risk arbitrage peter van tassel federal reserve bank of new york staff reports, no. Global and asian perspectives is a welcome addition to the study of comparative takeover regulation. What is risk arbitrage the basics merger arbitrage. Praise for risk arbitrage an investors guide never in history have there been so many mergers and takeovers like those in the late 90s. The value of the freezeout option by zohar goshen, zvi.
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