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CFA l1 AI : In merger arbitrage why we short sell the form making acquisition as it can get synergies benefits from acquisition and can become more profitable?
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Hi,
In Merger Arbitrage we short sell the acquirer because in most of the cases the acquirer pays a higher price for the target firm i.e. it buys the target firm at a loss. Whereas we buy the target firm because it is getting more money than its valuation.
Hope this helps!
Hello. We short sell the firm whose making acquisition because this firm is spending a lot of money i.e is incurring huge capital expenditure to acquire the company and all of this is uncertain. The investment might fail and produce negative NPV in future. People are very skeptical as to how there money will be utilized. Whereas, the company who is getting acquired is sure shot going to get money from as they are selling their business to the acquirer.