Abbot Labs & Alza Analysis
1. Risk arbitrage is an investment technique that occurs after a merger has been announced. Following this, the price of the target firm usually increases but still may not rise to the price offered by the acquiring firm. Generally speaking, the spread is positive. It is intended to compensate investors for the time to completion and the risk that the merger will not be consummated. In the case of the Abbot Labs (Abbot) and Alza merger - where a stock deal is proposed, the strategy involves purchasing the stock of the target, while simultaneously shorting the stock of the acquiring firm. The position, i.e. how much is bought and sold, depends on the exchange ratio of the deal.
The inherent risk with risk arbitrage is that the merger does not proceed, and rather than the target company receiving the previous offer price, the stock plummets. Being long in this company will subsequently result in significant losses when the position is unwound. In......
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