Analysis of Improved Bids in the Scope of a Risk Arbitrage Strategy

This document is a study of improved bids observed during announced mergers & acquisitions of listed companies. The scope of the analysis is the North American market (US and Canada) over the 1998-2011 period. An improved bid is defined as an improvement on the terms of the initial bid for a target either by the buyer or by a third party.In the scope of a risk arbitrage strategy, improved bids are important events, since they offer particularly interesting risk/return, similar to buying a call option. This document therefore aims to analyse improved bids from the point of view of an investor setting up an arbitrage strategy.The main conclusions are as follows: i) improved bids account for about 12% of finalised deals, ii)prevailing market conditions on equity and bond markets have an impact on the volume of improved bids as well as the observed yields. For example, towards the top of equity market cycles, the number of improved bids is particularly high. Conversely, the 2008 liquidity crisis led to a dramatic fall in yields on potential improved bid situations, iii) the market is efficient when it forecasts the outcome of certain improved bids. The higher the target's shares trade above the offer price in the days following the announcement, the likelier it is that the deal will have a favourable outcome for the investor, iv) even though improved bids are most commonly seen in hostile bid situations, it is hard to establish the typical profile for an improved bid: neither the payment type nor the sector of the target, nor the nationality of the buyer are deciding factors. Overall, the phenomenon is therefore difficult to forecast