iRobot Shows Just How Risky Investing in Mergers and Acquisitions Can Really Be
There's an investment tactic on Wall Street called merger arbitrage. It isn't meant to produce eye-catching home runs, instead focusing on getting a lot of reliable singles. On the surface, merger arbitrage seems like it would be easy, but (NASDAQ: IRBT) and Spirit Airlines (NYSE: SAVE) show it can be harder than it seems.
Here's why you need to be careful buying into mergers and acquisitions, noting that United States Steel (NYSE: X) looks like it could be the next pain point for investors.
The logic behind merger arbitrage is pretty simple. When one company agrees to buy another company, it usually has to pay a premium for that company's shares. Once the potential for a deal is leaked to Wall Street, the price of the company being acquired normally jumps higher. When a deal is actually announced, the price of the company to be acquired tends to rise right up to, but not actually all the way to, the offer price.
Source Fool.com
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