Merger arbs are a key part of the M&A ecosystem. Basically, these are traders who assume the risk of buying shares in M&A targets, hoping to make a profit when the deals close.
Of course, during the boom times, this was a nice profit center for Wall Street.
But with the credit crunch, things have turned into a nightmare, as seen with botched deals for Harman International (NYSE: HAR), SLM (NYSE: SLM), and United Rentals (NYSE: URI).
In fact, according to a piece in the Wall Street Journal [subscription], it looks like merger arbs are thinking in terms of worst-case-scenarios. As a result, the spreads on deals (the difference between the buyout offer and the current stock price) have widened significantly, even for marquee deals.
For example, the spread on the Alliance Data Systems (NYSE: ADS) deal is $21 and the spread on the Clear Channel (NYSE: CCU) transaction is at $7.
Unfortunately, if some of these deals crater, we are likely to see real damage. That is, it will likely take quite some time for the private equity marketplace to make a comeback.
Tom Taulli is the author of various books, including The Complete M&A Handbook
