Since the first edition of this book interest rates have fallen to near zero and have dragged returns on merger arbitrage with them. With the foreseeable end of the Federal Reserve's zero interest rate policy it is likely that investors will allocate to merger arbitrage again in the near future. This book is written as a guide to potential investors who seek to understand the strategy better prior to committing an investment, investors who may have an allocation to merger arbitrage through model portfolios or maybe even their pension plan, as well as aspiring arbitrageurs.

Merger arbitrage, also known as risk arbitrage, has grown exponentially since the 1980s from small operations within Wall Street firms to standalone arbitrage funds directly accessible to the public. Yet, surprisingly little has been written on the topic. A number of academics have written studies about various aspects of the strategy. For the general public, I can count only six books on the topic. This small number pales in comparison to the information overload that other areas of finance experience. Since Guy Wyser-Pratte's two monographs in the 1970s, only three other books about merger arbitrage have been published. One of them is Ivan Boesky's Merger Mania. Maybe potential writers fear that authoring a merger arbitrage book stands under a bad omen because Boesky was arrested a few weeks after the publication of his book. As the author of a merger arbitrage book, I certainly hope that writing a book and getting arrested are linked only by correlation and not causality.

In this book I try to go beyond a mere description of the arbitrage process to incorporate some thoughts on the benefits of adding merger arbitrage to an investment portfolio, and the vehicles that investors can utilize to access the strategy. The expansion of the book's horizon will make it more relevant to a broader investment audience. Nevertheless, the focus of the book remains on mergers and merger arbitrage and not asset allocation or portfolio management.

The book is organized into three parts: the first three chapters introduce the basics of the arbitrage process and explain the benefits of the investment strategy in the context of a portfolio allocation. Chapters 4 to 8 discuss more details about the analysis involved in an arbitrage decision. Chapters 9 to 11 discuss special transactions that warrant particular diligence by arbitrageurs. Chapters 12 to 14 address additional regulatory aspects as well as practical considerations, including measures arbitrageurs can take to defend their interests, such as exercising appraisal rights.

The first two chapters explain the basic types of mergers and how to set up the arbitrage.

Chapter 3 is an interlude that explains the historical performance of merger arbitrage as an investment strategy, and how it can be added to a diversified portfolio. This chapter in particular will be relevant for investors who are looking to add merger arbitrage to their portfolio.

Chapter 4 expands the basic arbitrage by incorporating risk. Probabilities of failure and potential losses are incorporated into the return calculation to find an expected return of the arbitrage. Chapter 5 discusses different sources of risk and return in more detail, in particular the timing of mergers, leverage, and short sales.

The difference between mergers and tender offers is not well understood by many investment professionals. The terms are often used interchangeably. Chapter 6 goes into details and should be of interest to all investors, not just those seeking to read up on merger arbitrage.

Financing is often one of the most critical parts of an acquisition, and so Chapter 7 will look at different financing options.

Mergers are subject to a plethora of legal requirements, and I discuss them under different angles. Readers should keep in mind that this is a financial book and not a legal textbook, so that many aspects are touched on only in a cursory manner. Boards of directors have to follow a number of procedures to ensure that a merger is fair to shareholders. This will be discussed in Chapter 8.

Unfortunately, the law that is supposed to protect shareholders is often disregarded when managers buy the companies that they are managing as agents of their shareholders. Chapter 9 looks at management incentives for getting mergers done and how the interest of managers are often diametrically opposed to those of shareholders.

Similar conflicts of interest between managers, acquirers, and shareholders can be found in buyouts by private equity funds, discussed in Chapter 10.

Minority squeeze-outs present risks of their own to merger arbitrageurs, and therefore are discussed in a chapter of their own, Chapter 11.

The government gets involved in the merger process on several levels, federal and state. Despite the obvious importance of government regulations, I have decided to relegate its discussion further to the back of the book because I believe that the motivations of the market participants—management, financiers, board members—are more relevant by far to the success of a merger than government regulations, discussed in Chapter 12. As they say: where there is a will, there is a way.

Next, I step into a minefield by encouraging investors to seek to exercise their rights and get full value for their shares when a company is taken over. Chapter 13 describes methods that shareholders can use to that end. Too often have I seen investors resign when their company gets taken over for a lowball price. Most investors view themselves as stock pickers and will throw in the towel too early. I hope that this chapter will convince investors, maybe even some institutional investors, to fight for full value. Chapter 14 gives some practical tips on investing in merger arbitrage. In particular, readers should retain that cash holdings of event-driven investment strategies are dependent on events and not a deliberate asset allocation decision. As a result, merger arbitrageurs can have highly variable cash positions that are not an indication of the arbitrageur's view of the market.

The last chapter contains some mathematical material. Stephen Hawking remarked in the introduction to his well-known A Brief History of Time that his publisher advised him that each formula would reduce the potential readership by half. I trust that readers of financial books can handle a few formulae.