Regulatory Reviews Lift Spreads for Merger Arbitrage Funds

Research from Davidson Kempner found that transactions subject to antitrust, national security or political scrutiny offered roughly a 60% higher premium over the past five years than simpler deals. The gap has grown compared with the prior five-year period, and wider spreads have been more common since 2021 as megadeals made up a larger share of global M&A activity.

Merger arbitrage managers buy shares in takeover targets that trade below the agreed offer price, aiming to capture the difference if and when a deal closes. When a transaction faces regulatory or political hurdles, markets demand a higher premium to compensate for the risk of delay or failure, which widens the spread available to investors.

Regulatory reviews can involve multiple U.S. and foreign bodies. Outcomes can depend on federal regulators, state attorneys general, foreign investment screening agencies and political actors in affected jurisdictions. High-profile deals that required such approvals include Electronic Arts’ proposed $55 billion leveraged buyout and Paramount’s proposed $111 billion acquisition of Warner Bros. Discovery.

Market participants report that the approval process has become harder to predict. While shifts in federal antitrust policy have at times encouraged dealmaking, state litigation, foreign government screening and political considerations have added layers of uncertainty. Managers now assess legal risks alongside buyer commitment, the likelihood of protracted litigation or remedies, and whether parties are willing to wait through extended reviews.

Arbitrage firms with teams experienced in regulatory analysis and international law say they model multiple regulatory scenarios and evaluate counterparties’ incentives to estimate deal odds. Those managers report higher returns when their assessments match outcomes.

Investors and managers report that heavier deal flow combined with more complex reviews has expanded the opportunity set for merger arbitrage and increased demand for detailed, deal-by-deal analysis and cross-jurisdiction expertise.