In merger arbitrage, what is the typical strategy?

In merger arbitrage, the typical strategy involves taking advantage of the price discrepancies that arise before and after a merger is announced. When a merger is proposed, the stock price of the target company usually trades at a discount to the acquisition price offered by the acquirer, reflecting uncertainty about the deal's completion.

The strategy often involves buying shares of the target company, as the investor anticipates that the stock price will rise to meet the acquisition price once the merger is finalized. However, the provided answer specifically mentions a strategy where shares of the acquiring company are purchased while shorting the target's stock, which is a distinctive approach.

In this strategy, the investor is betting that the proposed acquisition will go through. By shorting the target's stock, the investor hedges against the risk of the merger failing. If the acquisition proceeds as planned, the investor benefits from the differential between the stock prices. This method reduces exposure to broader market movements and focuses on the specific event of the merger.

Other strategies not mentioned would typically involve just taking a long position in the target or acquiring bonds related to the deal, but these don't provide the same hedging mechanism against unsuccessful mergers and tend to focus on different aspects of merger arbitrage. Hence, the approach described is