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shamapant (78.17)

Question about Buffett "arbitrage"

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August 09, 2011 – Comments (1) | RELATED TICKERS: TRH.DL


Reading Buffettology and it talks about how Buffett would invest in a company that was going to be acquired for a higher price so that he could pocket the difference between the acquisition price and the market price. However, it says to be sure of this, he always waited till AFTER the acquisition was stated. I was wondering if someone would help me verify the risk involved in this 'arbitrage' investment. 

Today Transatlantic turned down Berkshire's offer to buy it for 52 per share because it thought it could solicit a higher offer from others. However, would it be safe to assume that because of this, Transatlantic's shares should be valued at at least 52 dollars per share, and that investing in it at current market price, 48.5, would yield me a profit of AT LEAST 7.2%? 

Thanks

Shamapant 

1 Comments – Post Your Own

#1) On August 09, 2011 at 5:45 AM, TMFAleph1 (96.39) wrote:

Also known as 'risk arbitrage' or 'merger arbitrage.' 

However, would it be safe to assume that because of this, Transatlantic's shares should be valued at at least 52 dollars per share, and that investing in it at current market price, 48.5, would yield me a profit of AT LEAST 7.2%? 

No, it's not safe to assume that at all; in fact, you should assume the contrary, i.e. that the shares are fairly priced at $48.50. There are numerous hedge funds that focus on risk arbitrage and other types of event-driven investing and it's very highly unlikely that you understand this situation better than they do.

On the whole, risk arbitrage is not a good area for individual investors. Read You Can be a Stock Market Genius by Joel Greenblatt for more on this topic.

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