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FRM Part I · FRM Exam Part I · Fund Management

Which of the following best describes a merger arbitrage strategy in which the acquirer offers its own shares to the target's shareholders?

The arbitrageur buys the target's shares and shorts the acquirer's shares in proportion to the exchange ratio. This captures the spread between the target's price and the offer's value if the deal completes, with deal-break risk as the main danger.

  1. ABuy the acquirer's shares and short the target's shares in proportion to the exchange ratio
  2. BBuy the target's shares and short the acquirer's shares in proportion to the exchange ratioCorrect
  3. CBuy both the target's and acquirer's shares to benefit from the takeover premium
  4. DShort both companies' shares, expecting the deal to fail

Explanation

In a stock-for-stock deal the target trades at a discount to the offer value. The arbitrageur buys the target and shorts the acquirer's shares according to the exchange ratio, locking in the spread if the deal closes. The reverse position would lose the spread. The main risk is deal failure.

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