CNN Money – Thanks to a spate of blockbuster deals, hedge funds that bet on mergers are on a tear, making almost as much money in the opening weeks of 2006 as they did in all of 2005.
These hedge funds use a strategy known in the business as “merger arbitrage” or “risk arbitrage,” meaning they seek to profit from the “spread” between the current market price of a company being acquired and the price once a deal has gone through.
Managers of these funds, which are private, lightly regulated investment vehicles for wealthy people and institutions, usually buy the stock of the company being acquired while betting against the acquirer.
The “risk” in risk arbitrage refers to the chance that a deal may not close on time, or at all, which would cause the target company’s price to drop.
Justin Dew, senior hedge fund analyst at Standard & Poor’s, said that January was the busiest month for mergers since January 2000, owing to such blockbuster deals as Boston Scientific’s $27 billion bid to buy rival medical device maker Guidant and Disney’s plans to snap up Pixar for about $7.4 billion.
And the deals that have been announced this month — AT&T agreeing to buy Bell South, McClatchy inking a deal for Knight Ridder, and Capital One announcing a merger with North Fork — give new meaning to the phrase “March Madness.”
