About AOTM

About Merger Arbitrage of the Month:

During times of economic and financial market turmoil, volatility, and uncertainty, sometimes more predictable investment returns are attractive. Merger Arbitrage of the Month dot com is designed to give investors ideas of how to make small gains and bypassing the unpredictability of the marketplace.

The idea behind making arbitrage trades is to generate small returns in a relatively short amount of time (sometimes days, buy usually weeks or months) and repeat the process several times a year, rather than trying to predict what the stock market itself will do. Most arbitrage trades are not correlated to the market, but rather an individual event tied to a certain company.

The most common form of arbitrage on this site is merger arbitrage. The idea is simply to take advantage of the time value of money by investing in a company that is set to be purchased by another. Oftentimes the stock will trade at a slight discount to the offer price because it takes several months for a deal to actually be completed after it is announced to the public. For example, if a company is being bought out for $50.00 per share, but the deal will take 6 months to close in order to allow time for a shareholder vote, federal anti-trust approvals, etc, then the shares might only fetch $48, or a 4% discount to the amount of money a shareholder is expected to collect upon the deal’s closing.

Now, making a few percentage points in profit may not sound very exciting, but if you are able to earn that kind of return 2 or 3 times per year, the gains really begin to compound nicely and you do not have to take on very much market risk. A 2% gain in 3 months results in an annualized return of 8.2%, not much less than the 10% or so that the stock market averages over the long term. Moreover, locking in a 2% via arbitrage is a lot more predictable than the market as a whole.