Merger arbitrage, explained

When a company agrees to be acquired, its stock usually jumps close to the agreed price, but not all the way. The gap that remains is the merger-arbitrage spread, and trying to capture it is one of the oldest event-driven strategies. The spread is not free money. It is the market pricing the chance that the deal falls through. Here is how it works, why deals break, and where to read the filings that tell the story.

The spread, and what it pays for

Once a deal is announced, the target trades a little below the offer. If a company is being bought for $50 and the stock sits at $48, that $2 is the spread. Buy at $48, and you collect $50 if the deal closes. The return depends on how wide the spread is and how long you wait for the close. The spread is wide when the market sees real risk and narrow when the deal looks like a formality.

Why deals do not always close

Most announced deals do close. But enough fail that the risk is real, and when one breaks the target usually falls back toward where it traded before the offer. The usual reasons:

• Regulators block it. Antitrust agencies (the DOJ or FTC) or national-security review (CFIUS) can object.
• The buyer's financing falls apart.
• Target shareholders vote it down.
• A material adverse change lets the buyer walk away.
• A higher bid pulls one side toward a different deal.

This is not hypothetical. We have flagged 113 mergers in the catalog that were terminated, including Zoom's collapsed acquisition of Five9 and WillScot's deal for McGrath RentCorp, which fell apart under antitrust review. You can see the live deals and the broken ones together on the mergers calendar.

The filings that track a deal

A merger is a sequence of public filings, and each milestone has its own marker:

• The signed agreement: an 8-K under Item 1.01.
• The vote: the definitive merger proxy (DEFM14A) sets the shareholder meeting, and the result is reported in an 8-K under Item 5.07.
• The close: an 8-K under Item 2.01, completion of an acquisition.
• The break: an 8-K under Item 1.02, termination of a material definitive agreement. That is the signal we use to mark a deal withdrawn.

Cash versus stock

In a cash deal the spread is simply the offer price minus the market price. In a stock deal the buyer pays in its own shares, so the target's value moves with the acquirer, and traders often short the buyer to lock in the exchange ratio. A stock deal carries the extra risk that the acquirer's price drops before the close.

A strategy with real risk

Arbitrage spreads are narrow because the strategy is crowded and the downside is sharp. A broken deal can erase months of small gains in a single day. The spread is the compensation for bearing deal risk, not a free yield, which is exactly why the terminated deals in our catalog are worth studying alongside the ones that closed.

We track every definitive merger proxy in the catalog and flag the deals that terminated, so you can study both. Start with the mergers calendar, or read how a spin-off works instead in How a spin-off happens.