Definition of Risk arbitrage:
When a merger and acquisition (M&A) deal is announced, the target firm's stock price jumps toward the valuation set by the acquirer. The acquirer will propose to finance the transaction in one of three ways: all cash, all stock, or a combination of cash and stock.
Seeks to capitalize on the discrepancy between the market prices of the stocks of two firms being merged. It usually involves buying the stock of the acquiree firm and simultaneously selling the stock of the acquirer firm.
Risk arbitrage, also known as merger arbitrage, is an investment strategy to profit from the narrowing of a gap of the trading price of a target's stock and the acquirer's valuation of that stock in an intended takeover deal. In a stock-for-stock merger, risk arbitrage involves buying the shares of the target and selling short the shares of the acquirer. This investment strategy will be profitable if the deal is consummated. If it is not, the investor will lose money.
How to use Risk arbitrage in a sentence?
- In an all-stock offer, a risk arbitrage investor would buy shares of the target company and simultaneously short sell the shares of the acquirer.
- After the acquiring company announces its intention to buy the target company, the acquirer's stock price typically declines, while the target company's stock price generally rises.
- The risk to the investor in this strategy is that the takeover deal falls through, causing the investor to suffer losses.
- Risk arbitrage is an investment strategy used during takeover deals that enables an investor to profit from the difference in the trading price of the target's stock and the acquirer's valuation of that stock.
Meaning of Risk arbitrage & Risk arbitrage Definition