# Merger Arbitrage Playbook

Use this reference for cash mergers, stock deals, tender offers, collars, competing bids, recuts, deal breaks, and CVRs.

## PM objective

Answer: Is the spread paying us for the real risk after timing, downside, financing, regulatory path, shareholder vote, acquirer risk, and liquidity?

## Required fact pack

- Buyer, target, ticker, security, exchange.
- Announcement date and unaffected date.
- Current target price and timestamp.
- Consideration: cash, stock, mixed, election, collar, CVR, tender.
- Deal value per share and transaction value.
- Current gross spread and annualized spread.
- Expected close date and outside date.
- Required approvals: target vote, acquirer vote, antitrust, CFIUS, sector regulator, foreign approvals.
- Conditions: financing, no injunction, material adverse effect, minimum tender, tax opinion, listing approval.
- Break fee, reverse termination fee, ticking fee if any.
- Financing commitments and expiration.
- Litigation status.
- Borrow and options availability if hedging.
- Source documents reviewed and missing documents.

## Cash deal analysis

Must produce:
- Gross spread.
- Annualized spread.
- Market-implied close probability.
- Analyst probability tree.
- Break price/downside methodology.
- Expected value and expected annualized return.
- Gating item and next catalyst.
- Trade recommendation.

Market-implied probability:
`(current target price - break price) / (cash deal price - break price)`

Senior checks:
- Is the break price leak-adjusted and peer-adjusted?
- Is downside worse because the target issued weak earnings or guidance after announcement?
- Is the reverse termination fee large enough to show buyer commitment?
- Does buyer have a financing out or conditional funding?
- Does the outside date allow enough time for litigation or remedies?
- Is the spread wide because of real risk, crowding, illiquidity, small-cap neglect, tax, index deletion, or borrow mechanics?

## Stock-for-stock deal analysis

Must produce:
- Exchange ratio and deal value.
- Long target / short acquirer hedge ratio.
- Gross spread and annualized spread.
- Collar sensitivity if applicable.
- Dividend and borrow adjustment.
- Acquirer vote risk.
- Acquirer fundamental risk and stock volatility.
- Residual beta and factor exposure.

Senior checks:
- Does the acquirer short create borrow, dividend, or squeeze risk?
- Does the collar change the hedge at different acquirer prices?
- Does the acquirer shareholder base support the transaction?
- Is the acquirer overpaying in a way that creates short-leg risk if the deal breaks?
- Is the target really the cleanest expression, or is the acquirer mispriced?

## Tender offer analysis

Must produce:
- Offer price and expiration.
- Minimum tender condition.
- Proration mechanics.
- Withdrawal rights.
- Extension path.
- Regulatory conditions.
- Back-end merger or squeeze-out process.
- Tax considerations if relevant.

Senior checks:
- Can the tender close without a shareholder meeting?
- Is the minimum condition likely to be satisfied?
- Are arbs or insiders blocking tender participation?
- Does the buyer have enough financing and legal ability to extend?

## Regulatory underwriting

Do not write `regulatory risk` generically. Identify:
- Agency and jurisdiction.
- Review stage.
- Theory of harm.
- Market definition.
- Customer/competitor opposition.
- Remedy feasibility.
- Political sensitivity.
- Litigation probability.
- Interaction with outside date and financing.

Common issue types:
- Horizontal concentration.
- Vertical foreclosure.
- Potential competition.
- Nascent competition.
- Platform/ecosystem entrenchment.
- Labor-market effects.
- Buyer power or monopsony.
- Serial acquisition roll-up.
- National security/data sensitivity.

## Deal document review checklist

From the merger agreement or tender documents, extract:
- Consideration and adjustment mechanisms.
- Outside date and extension mechanics.
- Regulatory efforts covenant: reasonable best efforts, hell-or-high-water, divestiture cap.
- No-shop, go-shop, fiduciary out.
- Matching rights.
- Break fee and reverse termination fee.
- Financing cooperation and debt commitment terms.
- MAC definition and carveouts.
- Interim operating covenants.
- Termination rights.
- Specific performance availability.
- Shareholder support agreements.

## Scenario tree template

Scenarios should usually include:
- Close on time.
- Close with delay/remedy.
- Price recut.
- Competing bid/higher bid if plausible.
- Break.

For each scenario, include probability, timing, terminal value, return, rationale, and signposts.

## Recommendation language examples

- `Attractive, but size as a regulatory trade rather than a clean arb. The spread pays for a second-request path, but not for full litigation.`
- `Avoid despite optical annualized spread. Break downside is understated and buyer financing is vulnerable.`
- `Prefer options because the event is binary and timeline uncertain.`
- `Prefer long target / short acquirer at deal ratio; residual acquirer vote risk argues for lower sizing.`

## Merger arb final checklist

Before finalizing:
- Deal terms verified from primary source or marked unverified.
- Current price and spread timestamped.
- Break price is triangulated, not blindly unaffected.
- Market-implied probability shown.
- Our probability tree shown and sums to 100%.
- Gating item is specific.
- Outside date and expected close date distinguished.
- Trade expression and sizing/risk comments included.
- Monitoring plan has next date and action.