Merger Arbitrage     7

Merger Arbitrage Approaches

Cash Mergers or Tender Offers

Stock Swap Mergers

Stock Swap Mergers with a Collar

Multiple Bidder Situations

Leveraged Buyouts and Hostile Takeovers

Risk

Event Risk

Deal Flow

Liquidity

Risk Control

Diversification

Leverage

Source of Return

Growth and Recent Developments in Merger Arbitrage

Deal Flow and Other Factors Affecting Volume

Stress Period: The Third Quarter of 1998

Returns

Merger arbitrage usually involves buying the common stock of a company that is being acquired, or merging with another company and selling short the stock of the acquiring company. Some managers may use options rather than stocks if the trade can be done more cheaply that way.

The target company's stock will typically ...

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