A hedge fund strategy in which the stocks of two merging companies are simultaneously bought and sold to create a riskless profit. A merger arbitrageur looks at the risk that the merger deal will not close on time, or at all. Because of this slight uncertainty, the target company’s stock will typically sell at a discount to the price that the combined company will have when the merger is closed. This discrepancy is the arbitrageur’s profit.
We recently reviewed the Cedar Fair (FUN) and 3Com Corp (COMS) deals, and updates on both are necessary. As transactions have been closing or terminating recently, merger arb money is going to the sidelines to wait for the next opportunitiesOn April 6, two days before the rescheduled shareholder vote was supposed to be held, FUN and Apollo announced that they have mutually terminated their merger agreement. The termination occurred after FUN determined that it lacked the required level of investor support. FUN agreed to pay Apollo $6.5 million for expense reimbursement, and both parties agreed to release each other from all obligations with respect to the merger, as well as from any claims arising from the merger. Additionally, FUN adopted a poison pill with a 20% threshold.
A regular portfolio manager may focus only on the profitability of the merged entity. In contrast, merger arbitrageurs care only about the probability of the deal being approved and how long it will take the deal to close.