Need an Overview on M&A Arbitrage (Modelling specifically)

Became interested in M&A Arbitrage recently and am hoping to get a deeper look at how it all works. Know the bare minimum basics, but need some recommendations on readings/resources to learn more. 

Also am more specifically interested in learning how the valuation process works in the M&A Arbitrage strategy + the research process surrounding the job. If anyone knows where I can find some resources on how to build M&A Abirtrage specific valuation models (if there even is such a thing) would be much appreciated. 

Don't have a quant background at all but from my readings, I've seen that M&A Arbitrage is apparently both art and science, and can approach the strategy from a fundamental outlook rather than a math/quant driven approach which is what I mean regarding potentially modelling out the strat. 

Thanks for any help/insight anyone can provide. 

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Comments (6)

Oct 8, 2021 - 4:37am

It's not really about valuation, it's more about probabilities

Say a company is trading at $8 and another company comes along and offers $10, and then the target trades at $9 the arbs would say this deal trades at an implied probability of 50%

Academic nerds have run studies on M&A completion rates that come out roughly as 80-90% of deals that get announced so most of the time arbs are trying to figure out if the implied probability is justified by the risk of the deal or if there is something the market is over/under-estimating which would lead the implied probability to be mispriced

In reality given insider trading is, like, actually illegal now (vs say the 80s) arbs just yolo any deal with any semblance of a spread and hope for the best (they more or less own all the same stuff)

  • Prospect in IB - Gen
Oct 9, 2021 - 4:33am

So is there no semblance of valuation of the deal in terms of an Accretion Dilution Analysis at all? Mainly just probabilistic models for the deal to fall through to capture the spread? Or just a whole bunch of guesswork once the deal has been announced lol. Thanks for your help 

Oct 9, 2021 - 2:08pm

For 'pure' merger arb you only really care about accretion / dilution or valuation in so far as it informs the probability of a deal going through or a counterbid / bump

Are you going to have some differentiation through shovelling in some management guidance on synergies into some vanilla merger model?  No

Could you spin some wheels doing DCFs and modelling the company in minute detail to calculate accretion?  Sure, but sellside, price action and news flow is going to be more informative so why bother

In reality the big deals are just punts on antitrust which is increasingly political or speculation on a bump or counterbid which seems pretty random

Arbs also have a go at going long the acquirer but invariably lose money because they know nothing about the industry and large M&A deals are full of execution risk and generally have negative signalling value (why risk your reputation as CEO on a big deal unless your underlying business is having some issues)

Most Helpful
Oct 9, 2021 - 7:49am

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