Merger Arbitrage – 5 Steps to Hedging Time Period Deal Risk in M&A

#ActiveAllocator Research – The typical investment banking M&A process is dull, static and has not evolved much in the past two decades that I have been observing it. What is needed is innovation – sadly conspicuous by absence in a largely secretive world. I have long believed that financial options, modern finance can bring much to investment banking. To illustrate/ amplify my point I show how the time period for closure during announced M&A deals can be hedged using simple put and call options. Happy to provide more esoteric examples and variants too. We describe in a very simple illustration the mechanics of setting up and implementing a hedge.

Step 1: Deciding between Floating vs. Fixed Exchange Ratio Collar

8a-M&A hedge

Step 2: Designing a Hedge – Objectives

8b- M&a Hedge

Step 3: Designing a Hedge – Parameters

8c- M&a hEDGE

Step 4: Designing a Hedge – Deciding on Collar Width

8D- m&A hedge

Step 5: Designing a Hedge – Pricing the Hedge (Illustrative) 

8e-M&a HEDGE

Author: Sameer_Jain

Partner. Sameer Jain is founder of FinTech ActiveAllocator.com, the world’s first portal that seamlessly integrates traditional, illiquid and alternative investments within portfolios. Prior to this he was Chief Economist & Managing Director at AR Capital. Before that he headed Investment Content & Strategy at UBS Alternative Investments. At UBS, he served as a non-voting member of the Wealth Management Research investment committee, and as a capital allocator was responsible for all illiquid investing including fund manager selection and due diligence across the platform. Prior to UBS he headed product development & investment research at Citigroup Alternative Investments that managed over $75 billion of alternative investments across hedge funds, managed futures, private equity, credit structures, infrastructure and real estate. Here he led a team that developed proprietary models for portfolio strategy and asset allocation with alternative investments, provided investment support and research to pension plans, sovereign wealth funds, endowments as well as internal clients including Citi Private Bank. Before this he was with Cambridge Alternative Investments and SunGard (System Access) where he travelled to over 80 countries for work across Europe, Asia, Middle-East and Africa. He has written over 30 academic and practitioner articles on alternative investments with thousands of downloads at SSRN, presented at over a hundred industry conferences and has coauthored a book, Active Equity Management. Mr. Jain has multiple degrees in engineering, management, public administration and policy and is a graduate of Massachusetts Institute of Technology and Harvard University. He is a recipient of the Alfred Sloan Fellowship and subsequently was a Fellow of Public Policy and Management at the Harvard Kennedy School of Government for a year. He holds Series 7 and 66 securities licenses.

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