An investment strategy that involves investing in securities of companies subject to some form of corporate transaction, including take over or merger proposals. Typically, a manager purchases the stock of a company being acquired or merging with another company, and short sells the stock of the acquiring company.
Whereby the stocks of two merging companies are simultaneously bought and sold. Merger arbitrageurs look at the risk of the deal not closing 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 has when the merger is closed.