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Extra Credit, Friday Edition   MBIA and Ambac Fight for Their Lives
Jan 18 2008 9:00AM EST

Failed Hedge Fund Strategy Du Jour: Merger Arbitrage

Last week, I wondered whether Sam Heyman had lost $1 billion on a merger-arb strategy. And now Dana Cimilluca has found a couple of other companies where merger arbs are likely to have lost a huge amount of money, at least on a mark-to-market basis. Blackstone Group has agreed to buy Alliance Data Systems for $81.75 per share; that stock is currently trading at $52.82. And despite the fact that Merrill Lynch's private-equity arm has agreed to buy Cumulus Media for $11.75 per share, Cumulus closed Thursday at $6.05.

In both cases, the buyer is saying that the deal is indeed going to go ahead. So forgive me for asking the obvious question: why on earth aren't Blackstone and Merrill buying up their targets' stock like it was going out of fashion?

In any case, it seems that merger arbitrage might be the new statistical arbitrage: a strategy which performed very well, until it didn't.

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