What is Merger Arbitrage?

David Witkin, CEO of Beryl Capital Management, is dedicated to serving his community, which he has done recently as a Little League coach. A Harvard graduate, David Witkin wrote his senior thesis on international merger arbitrage.

Arbitrage is the act of simultaneously buying an asset at one location and selling it at another with the goal of making a profit based on the price difference between the two places. Although the price difference can be very small, arbitrageurs, also referred to as arbs, generally trade on a regular basis and in large volume, thus increasing the possible profits.

A merger arbitrageur analyzes the risk associated with the deal not closing on time or not at all. This slight uncertainty can cause the target company's stock to sell at a reduced priced compared to its price once the merger is closed. The arbitrageur's profit lies in this discrepancy. The strategy, however, is not foolproof. It relies on split-second timing and can backfire if changes occur in interest rates, currency exchange rates, prices, or a number of other factors not anticipated by the arbitrageurs.