Merger and Acquisition (M+A) is when you trade the stock of a company based on a future event. This event will be a merger or acquisition. When these events are announced as a “deal” it usually is based on a “target price” for the company. There tends to be a gap between the current price and the target price and this is a spread that can be traded through arbitrage trading. There are many risks involved in arbitrage trading and you must understand them to trade safely. (click here for other day trading strategies).
Acquistion Cash Offer:
This occurs when the acquiring company offers to buy out the company’s shareholders at a fixed price. At this point the “target” company’s stock price begins to rise towards the offer price. This price rise is usually very sharp but stabilizes below the offer price. This price differential called the “spread” is what can be traded using the arbitrage trading style. You find the stabilized spot and trade between that price and the offer prices taking whatever profit is there to be taken. Each stock trades a little differently and the profits will vary from trade to trade.
The next time there is a cash offer in the market, watch the stock rise and perform similar to what we mentioned. With these cash offers you have to worry about them falling through and the price dropping to pre-offer prices.
Stock for Stock:
This type deal is much harder to trade. One of the best ways to trade is to own shares in the acquiring company. Often these trades are if you own company A on the ex-dividend date you will receive one share of company B for each share you own in A. It may be 2 shares or 1/4th of a share, any number combination is possible.
Cash and Stock:
Obviously, this is a combination of the 2 previously mentioned types of mergers and acquisitions. This type involves a trade for both cash and stock shares. This type can be the trickiest to play. You will have to figure the value of the stock out post deal combined with the amount of cash given to you in order to find out if the deal is profitable. Trading these also become more difficult although after a few of them, they’re easier to read when trading.
The easiest deal to trade is the Cash deal using the arbitrage style of trading. You will know the price being paid, the potential gain from the difference you are paying and be able to scalp trades within that range. Then if you want to hold the stock through the merger or acquisition you can and take the cash from the buyout.
These are not easy trades to make but they’re not very difficult either. These are additional day trading strategies that can make you money while your trying to earn a living day trading.
