The agreement by Electronic Arts Inc to sell itself to a group of investors — a deal that would be the largest leveraged buyout on record — has created an attractive money-making opportunity in a corner of Wall Street known as merger arbitrage. Arbitrageurs, known as arbs, seek to profit from the gap between where a stock trades today and the price a buyer has agreed to pay.The size of the EA deal, which values the video-game company at about $55bn, along with a wave of mergers and acquisitions in recent months, is a potential boon for arbs, who now have more names to trade on. But just as their wagers can reap large rewards, they also carry significant risks.What is merger arbitrage?Also called risk arbitrage, it’s a trading strategy, used primarily by hedge funds, to profit from price differences that arise when it becomes known that one company intends to acquire another. When that happens, the stock price of the target company often rises but not to the level of the offer price. The gap reflects the risk that the deal might not go through.Why is EA’s stock trading below the offer price?The buyer group that would take the publicly listed EA private agreed to pay $210 in cash per share. That represents roughly a 25% premium over the stock’s so-called unaffected price, which is where it was trading before the media began reporting on talks aimed at a deal.The proposed buyers — Silver Lake Management, Saudi Arabia’s Public Investment Fund and Affinity Partners, a firm managed by President Donald Trump’s son-in-law Jared Kushner — all have deep pockets. And JPMorgan Chase & Co has committed to providing about $20bn of debt.But it’s not a done deal yet.The transaction is still subject to shareholder approval and sign-offs from regulators. In the US, it’s expected that the deal will need to be reviewed by antitrust authorities and by the Committee on Foreign Investment, better known as CFIUS, which screens foreign investments in American companies. EA has a global footprint, and authorities in jurisdictions where it generates meaningful revenue — potentially the European Union, UK and China — could also review the deal.These processes could drag on. EA has said it aims to close the deal by mid-year 2026.How do arbs stand to profit from the EA deal?Given the risks of the deal falling apart and the fluidity of the timeline for its completion, the market is pricing in doubt. With EA stock trading slightly above $200 as of the market’s close on October 2, the deal spread — the gap between the trading price and the bid— is about $10, implying approximately 80% odds of completion, based on back-of-the-envelope math.Many holders of EA stock will cash out and lock in a gain rather than wait to see how the deal unfolds. That’s when arbs step in. In theory, by buying the stock and holding it to the close of the deal, arbitrage traders could pocket the spread. They could achieve nearly an 8% annualised return if the deal closes on time, a decent payoff compared with the roughly 3.5% yield on a nine-month US Treasury bills.EA has also agreed it may pay quarterly dividends of as much as $0.19 per share until closing. That’s small, but it’s still extra pennies for investors to collect along the way.What can go wrong with merger arbitrage?Regulatory review is usually the primary source of concern for arbs. Last year, an antitrust challenge sank a proposed tie-up between the makers of Coach and Kate Spade handbags, dealing a huge blow to many hedge funds that lost money on the arbitrage.In a different video-game industry deal a few years ago, Microsoft Corp’s takeover of Activision Blizzard Inc drew scrutiny on antitrust grounds in both the US and the UK. The reviews prolonged the saga, sending the spread up and down, for a year and a half before the deal was ultimately cleared.The environment for mergers and acquisitions was challenging during the Biden administration, when Lina Khan, who was chair of the Federal Trade Commission, took a tough approach on antitrust issues. Regulators have become more accommodating toward M&A since Trump’s return to the White House for a second term. Arb specialists expect that the deal to buy EA won’t raise significant antitrust flags because while Saudi Arabia’s PIF, the kingdom’s sovereign wealth fund, already has some investments in video games, the buyout wouldn’t represent a significant consolidation in the industry.The national security review is another risk. The saga around US Steel’s sale to Japan’s Nippon Steel showed how that process can muddy deal timing and outcomes. Then-President Joe Biden initially blocked the acquisition on national security grounds. Eighteen months following the deal’s announcement, it finally closed in June, after Trump extracted a concession giving the US government a so-called golden share in the targeted company.Another wrinkle is a potential competing bid. The agreement gives EA a 45-day period in which it can engage other suitors; if it accepts a superior offer, the original bidders would be entitled to a $1bn breakup fee.There can be other kinds of developments that can delay or sink a deal. For example, in early 2022, Elon Musk said he would buy Twitter Inc, creating an opening for arbs. His threats to walk away turned that deal into a roller coaster ride for them.And during periods of extreme market turmoil, buyers sometimes press to reduce prices, which can make an arb’s bet on a merger less or not at all profitable. LVMH successfully pushed for a price cut in its takeover of Tiffany & Co during the tumult of the Covid-19 pandemic.
October 07, 2025 | 07:45 PM