Companies buy other companies in the normal course of business. Often this is done as a merger or stock exchange offer. At the time a merger offer is announced, the market price of the securities of the acquiring company to be issued in the transaction is typically greater than the market price of the securities of the target company for which they are to be exchanged. This differential (or spread) will disappear as a successful closing date approaches. The sub-fund portfolio manager will evaluate the merger offer and if it is determined that the likelihood of consummation of the transaction is high, the sub-fund will purchase the lower priced securities of the target company and sell short the security of the acquiring company in the expectation that it will be covered by the delivery of such security on the closing of the merger. The profit is the price differential between the two securities, plus any dividends received on the target and the stock borrowing income received on the short acquirer’s stock. Essentially the same transaction can also be accomplished for cash tender offers.
