Definition
The arbitrage spread (often just “the spread”) is the gap between the announced offer price and where the target stock trades. Calculated as:
spread = (offer_price - market_price) / market_priceAnnualized to compare across deals with different expected closing dates.
What it tells you
- Tight spread (1–3% annualized) — market views completion as near-certain
- Moderate spread (5–10%) — meaningful but pricing-in completion-likely
- Wide spread (15%+) — significant perceived risk: regulatory, financing, or counter-bid concerns
Who watches it
Risk arbitrageurs (merger-arb funds) build positions to capture the spread. They size positions based on expected closing date, completion probability, and downside if the deal breaks.
Practical use
Long-term holders read the spread as a real-time market vote on the deal. A widening spread mid-process typically signals new perceived risk; a tightening spread typically signals reduced risk.