In one of the more entertaining investor-education videos you will see, SilverPepper compares corporate mergers to marriage, using a full cast of actors and two distinct settings in this video that explains merger arbitrage. As an attractive young couple prepares to say their vows, the groom is having second thoughts. Performing the wedding is a tie-dyed wearing hippie who regrets not investing earlier. Soon, the scene is changed to a stark boardroom, where a larger company offers to acquire a smaller one, creating a merger-arbitrage opportunity – the hippie priest hallucinates and thinks he has discovered a risk-free investment, but as the video points out, mergers (and weddings) can fall through.
Marriages and mergers are “big events” that dominate the lives of everyone involved. For this reason, merger arbitrage investing is called “event-driven” investing. Since there’s always a chance the proposed deal won’t go through, the stock of the company to be acquired typically rises to just under the price of the takeover bid, and event-driven funds take advantage of these opportunities by buying the shares of takeovers that they think will go through, and avoiding the shares of takeover deals that are not expected to be completed.