Merger arbitrage is a lucrative investment strategy if you can get the hang of it, but to do so requires a deeper understanding of the merger and acquisition process.
Failing to internalize this process will lead you to make less ideal trades, and those will ultimately lower your returns.
So, what exactly is the merger and acquisition process? How does it work?
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Merger and Acquisition Process Step By Step
The M&A process starts far earlier than investors may realize but are core to the strategic focus for companies. Investors are only usually aware of the later stages of the M&A cycle, but I’ll lay all of it out here below for a complete picture.
M&A Process Step 1: Define Strategy and Objectives
Companies and management need to know exactly what they want to achieve to know whether M&A is actually an avenue that they want to go down. This can take weeks to months.
M&A Process Step 2: Identify and Screen Targets
Once management settles on the M&A approach, they need to look for possible M&A candidates and then conduct basic research to see if it’s worth pursuing a deal. This can take up to 3 months.
M&A Process Step 3: Preliminary Due Diligence
This is a deeper look at the company: finances, reputation, customer concentration, legal risks, user metrics, management depth, etc. This usually takes a month or two.
M&A Process Step 4: Valuation and Initial Offer
Management (sometimes with the help of transaction advisory services) comes up with a range of value for the target company, then makes an offer. The target company’s management accept, reject, or counter the offer at a higher price. This can proceed quickly – a matter of weeks – or take months to unfold. It depends on how fierce the negotiations are.
M&A Process Step 5: Announce Intent and Market Reaction
Once negotiations are material (a strong possibility for a major change to the business), management must announce it in a regulatory filing. The stock of both companies may fluctuate.
M&A Process Step 6: Formal Due Diligence
This is a much deeper look at the target company after a tentative deal is struck. Management looks at contracts, IP, liabilities, compliance, tech infrastructure, detailed financial statements, then flags risks like data breaches or churn rates. This can take up to 3 months.
M&A Process Step 7: Negotiate and Sign Definitive Agreement
This is the big agreement that cements the deal legally. Here, no detail is left unaccounted for, and the management teams include break up fees and secure board approval for the deal. It can take up to a month.
M&A Process Step 8: Shareholder Approval
Management takes the deal they struck to shareholders, requiring a majority of them to vote for the deal. Management must file with regulators (e.g., SEC Form S-4), mail proxies to shareholders, and hold shareholder meetings. Activist investors may push back at this stage. This can take up to 3 months.
M&A Process Step 9: Secure Regulatory Approvals
Management must obtain clearance from bodies like the U.S. FTC, EU Commission, where necessary. Even if all goes well between the two management teams, there’s a chance that it’ll be blocked by regulators. Government being government, this can take a long time – up to 6 months.
M&A Process Step 10: Financing and Closing
Once approval is granted, the acquirer must finance the deal and close. This is where management arranges financing with banks or private creditors, executes stock/cash transfers, and files closing docs (e.g., SEC Form 425). The market reacts to finalization by pushing the gap between the acquisition price and market price closer. This process can take weeks.
The overall merger and acquisition process can take up to 2 years but typically finishes in between 6 and 18 months.
M&A Process Timeline
Here’s your quick pocket sized version that you can whip out the next time you’re looking at investing in a merger arb opportunity:
| Step | Name | Time | Details |
|---|---|---|---|
| 1 | Define Strategy | Weeks to Months | Firm defines what it wants to achieve |
| 2 | Identify Targets | Up to 3 Months | Conducts search for target company |
| 3 | Prelim Due Diligence | Up to 2 Months | Initial quality checks on target |
| 4 | Valuation & Offer | Weeks to Months | Acquirer makes a tentative offer |
| 5 | Announcements | Immediate | Files forms for material event |
| 6 | Formal Due DIligence | Up to 3 Months | Deep look at target company |
| 7 | Definitive Agreement | Up to a Month | Negotiate all details, vote, and sign |
| 8 | Shareholder Approval | Up to 3 Months | Meeting for shockholder approvals |
| 9 | Regulatory Approval | Up to 6 Months | Regulators assess the implications |
| 10 | Financing & Closing | Can Take Weeks | Get loans, swap stock, etc. |
| Total | Up to 2 Years |
Sell-side M&A process: Does the timeline differ for bankers?
The merger and acquisition process for sell-side bankers — investment bankers representing the seller — differs from the general public company M&A process in focus, responsibilities, and execution. While the overarching steps align, sell-side bankers prioritize maximizing value, marketing the company, and managing the sale rather than acquiring.
Sell side M&A involves bankers helping to sell a company for management. So, while before the focus was on the acquirer looking for a target, the sell-side M&A process focuses on trying to get a target company a date with a potential acquirer.
For example, bankers help with searching for a target by creating a buyer pool — strategic firms (e.g., travel tech companies) or financial buyers (PE firms) — and market the deal to them. Here, they draft a teaser (an anonymous summary), compile a CIM (Confidential Information Memorandum), and contact prospects.
Sell-side bankers also handle the bidding process, helping to drum up more bids and then evaluate them and present them to the company where acceptable.
2 Mergers and Acquisition Examples to Model Your Investing On
If you’re new to M&A investing, there’s really nothing like getting some examples to model your investing on. Here’s a few M&A Arbitrage examples that show the process and how investors could profit.
Kroger and Albertsons - An Example of a Failed M&A Deal
In October 2022, Kroger announced its intention to acquire Albertsons, a deal that would have created one of the largest grocery store chains in the United States, with nearly 5,000 stores and employing approximately 700,000 people.
Kroger wanted to improve its competitiveness against Wal-Mart, so it planned to look for a marriage partner to build a larger scale business. It hired Citigroup Inc. and Wells Fargo Securities as advisors on the deal.
After their search, Kroger landed on Albertsons as a suitable target. After some due diligence, in October 2022, Kroger offered Albertsons $24.6 billion ($34.10 per share in stock) for the company and filed the event with the SEC on Oct 13th, 2022, with a press release following a day later.
The Federal Trade Commission (FTC) and multiple state Attorney Generals sought to block the deal. The FTC argued that the merger would eliminate competition between Kroger and Albertsons, leading to higher prices, lower quality, and fewer shopping choices for consumers. Kroger and Albertsons, on the other hand, argued that the large company would increase bargaining power with suppliers, lead to cost savings through optimization & synergies, and this would allow the new company to lower prices and grow its customer base.
Ultimately, in December 2024, the consortium led by the FTC was successful in blocking the merger, and the deal was called off.
T-Mobile Acquires Sprint - An Excellent M&A Example
In the early 2010s, T-Mobile tried to merge with Sprint, but the deal was blocked by regulators, who were concerned about the deal’s impact on competition in the wireless telecommunications market.
But talks started back up after Trump took the presidency during his first term. The Trump administration’s FCC, led by Ajit Pai from 2017, favored industry consolidation to boost U.S. competitiveness, especially against China in 5G, so the companies thought that a merger may be approved. Sprint was also losing subscribers, so there was probably less concern over a dominant company post-merger.
T-Mobile hired PJT Partners and Goldman Sachs as financial advisors, and an agreement was announced on April 29th, 2018 where T-Mobile would acquire Sprint for $26.5 billion in stock ($8.74 per share).
Throughout 2019, Sprint traded at a discount to the implied deal value due to prolonged antitrust scrutiny from the DOJ and FCC. For instance, Sprint’s stock price was around $6-$7 in mid-2019, offering a spread of $1.74-$2.74 (20%-30%) against the eventual $8.74 value. This annualized to 15%-25% over the nine months to closure, a significant opportunity for arbitrageurs confident in regulatory approval.
The merger faced significant regulatory challenges from the Department of Justice and the Federal Communications Commission, as well as NY and California attorneys generals.
The DOJ’s Antitrust Division, led by Makan Delrahim, reviewed the merger for over a year, focusing on competition and consumer pricing. On July 26th, 2019, the DOJ approved it with conditions: T-Mobile and Sprint had to divest Sprint’s prepaid Boost Mobile brand to Dish Network, ensuring a fourth carrier. The FCC, under Chairman Ajit Pai, also approved the deal on October 16th, 2019, citing 5G investment benefits, though Commissioners Jessica Rosenworcel and Geoffrey Starks dissented, warning of market concentration.
A coalition of 14 state attorneys general, led by New York’s Letitia James and California’s Xavier Becerra, filed a lawsuit on June 11th, 2019, in the Southern District of New York to block it, arguing it would raise prices. On February 11th, 2020, Judge Victor Marrero ruled in favor of T-Mobile, finding insufficient evidence of harm.
With approval from the FTC, an investor could expect a greater than 50% odds that the lawsuit would not succeed and buy Sprint at $7 in anticipation of receiving $8.74 in stock for his shares. By shorting T-Mobile and going long an equivalent amount of Sprint, the investor would lock in a 24.9% gain if the deal succeeded.
Merger and Acquisition Process: People Also Ask
How long does a M&A process take?
Deals can happen quickly, closing within a year, or can take up to 2 years to close if there are regulatory issues.
Who usually benefits from a merger?
Who usually benefits from a merger depends on the deal in question. Shareholders of the target company can benefit if there is a good spread between the market price before the announcement and the offer price. On the other hand, if the deal succeeds in allowing the acquirer to achieve its strategic objectives (such as faster growth, lower costs, and higher pricing), the acquirer’s shareholders can benefit. But, in every case, the financial advisors and consultants come out the winners, getting to charge enormous fees for their services.
Who can sue to stop a merger?
Regulators, such as the FTC, and both federal and state attorney generals can sue to stop a merger.
What happens to debt in a merger?
In a merger debt is assumed by the acquirer and is owed by the combined post-merger firm.
What happens to assets in a merger?
In a merger, the ultimate ownership of assets is transferred to the acquirer. The target company may operate as a subsidiary of the acquirer, and in this case, the new subsidiary (the target company) would own the assets, while the parent (the acquirer) owns the subsidiary, so indirectly owns the assets.
Can you back out of a merger?
Yes, a company can often back out of a merger, but this usually comes with financial penalties being paid to the merger partner. Since a deal has been signed, there is an obligation to see the deal through – but contracts often include penalties for breaking off the merger.
Merger and Acquisition Process: Final Thoughts
I hope that this article has helped to clarify a lot of the merger and acquisition process for you. The whole M&A process is pretty straightforward, and deals typically follow the same path: forming strategic objectives, looking for a target, due diligence and valuation work, a tentative offer followed by deeper due diligence, a formal offer, announcement & filings, seeking regulatory approval, followed by shareholder vote (in many cases) and finally the culmination of the deal.
Whether you can profit from M&A arbitrage really comes down to your ability to find good deals, not deep knowledge of the M&A process itself. To that end, you need a constant stream of deals to look at, and it definitely helps to have some experienced investors sharing what they find.
We can help with the first. Sign up for our free Morning Brew email newsletter because we’ll send you a regular list of all the special situations we uncover over the course of a month. This is completely free – we simply send you all the deals in a nicely packaged email – and really cuts down the time and effort it takes to find suitable M&A opportunities.
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