Although famous arbitrageur George Soros made a career out of it, it's not easy to play the merger arbitrage game and win. When it works, you can make a tidy profit, but finding the right levers to pull hasn't been a simple task. Lately, it seems like deals have been coming apart more often than they get made, disappointing investors who had hoped to cash in when the mergers were finalized.
Look at the merger offer for Huntsman
The original agreement back in July 2007 called for Hexion to buy Huntsman for $28 a share. But this past June, Hexion argued that Huntsman's performance had deteriorated to the point at which the combined entity would be insolvent. Hexion sought to kill the buyout.
At first, it seemed that the courts might force the merger to go forward. Yesterday, however, Huntsman and Hexion announced that the parties had reached an agreement that lets Hexion off the hook and has Apollo paying Huntsman $1 billion. Huntsman shares today are down by more than half, to just $3 a share, as disappointed investors deal with a huge hit of the lost merger.
That's similar to an effort earlier this year to combine real estate investment trust (REIT) CapitalSource
Even Buffett sometimes misses his guess
Some deals seem like a bit more of a sure thing. Even if some big shareholders thought Warren Buffett's Berkshire Hathaway
In fact, those investors got an even bigger surprise. A rival bid by French utility Electricite de France for just the nuclear power assets of Constellation has boosted shares to more than $27 a share -- above Buffett's offer for the whole company.
There are plenty of arbitrage opportunities in the markets, but knowing which ones are likely to pay off isn't always easy. A perceived arbitrage play between Mueller Water's
Investors would be advised to tread carefully when thinking an arbitrage opportunity exists. Often times the smart money has already examined these plays and exploited whatever opportunities there are to profit from them. If something seems too good to be true, it probably is.
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Fool contributor Rich Duprey owns shares of Huntsman, but does not have a financial position in any of the other stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.