What does merger arbitrage aim to capture?

Merger arbitrage is a specialized investment strategy that seeks to profit from the price discrepancies that occur during a merger or acquisition. Specifically, it targets the difference between the market price of a company's stock before the merger announcement and the price that will be paid according to the terms of the merger once it is completed. This discrepancy arises because the market typically does not react instantaneously or accurately to the implications of a proposed merger.

Investors engaging in merger arbitrage will buy shares of the company being acquired (which is usually trading at a lower price than the acquisition price) and may hedge their positions using options or short selling the acquiring company’s stock to mitigate risk. The aim is to capture the spread between the current market price and the promised acquisition value once the deal closes.

This approach fundamentally focuses on the efficiency of market pricing and the conditions that lead to inefficiencies when mergers are announced, thus emphasizing the capture of the spread between the market prices and the intrinsic value that will be realized upon the deal's completion.

Other choices do not align with the specifics of merger arbitrage as they refer to different financial strategies or market dynamics not specific to the context of mergers and acquisitions.