when a corporation announces its intent to acquire another corporation the acquiring company s stock price typically decreases and the target company s stock price increases to secure the shares of the target company the acquiring firm must offer more than the current value of the shares the acquiring firm s stock price declines because of market speculation about the target firm or the price offered for the target firm 
however the target company s stock price typically remains below the announced acquisition price which is reflective of the deal s uncertainty in an all cash merger investors generally take a long position in the target firm if a merger arbitrageur expects a merger deal to break the arbitrageur may short shares of the target company s stock if a merger deal breaks the target company s share price typically falls to its share price prior to the deal announcement mergers may break due to a multitude of reasons such as regulations financial instability or unfavorable tax implications types of merger arbitragethere are two main types of corporate mergers cash and stock mergers in a cash merger the acquiring company purchases the target company s shares for cash alternatively a stock for stock merger involves the exchange of the acquiring company s stock for the target company s stock in a stock for stock merger a merger arbitrageur typically buys shares of the target company s stock while shorting shares of the acquiring company s stock if the deal is thus completed and the target company s stock is converted into the acquiring company s stock the merger arbitrageur could use the converted stock to cover the short position a merger arbitrageur could also replicate this strategy using options such as purchasing shares of the target company s stock while purchasing put options on the acquiring company s stock 