Definition
After a tender offer is announced, the target’s market price typically jumps toward (but rarely all the way to) the offer price. The gap between the two is the arbitrage spread.
What the gap means
- Tight spread (e.g., $99.50 vs $100 offer) — market views completion as highly likely; little perceived regulatory or condition risk
- Wide spread ($85 vs $100 offer) — market sees meaningful completion risk; could be regulatory hurdles, financing concerns, or expectations of competing bids
- Trading above offer ($105 vs $100 offer) — market expects a competing bid or a sweetened price
Why it matters
Risk arbitrageurs (merger-arb funds) play this gap. Their willingness to buy in the open market and tender at expiration provides liquidity to long-term holders who don’t want to wait for closing.