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When A Merger Arbitrage Goes Sour

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by Felix Salmon
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Jan 25 2008 12:00am EDT

When a Merger Arbitrage Goes Sour

The first rule of merger arbitrage is simple: Don't Try This At Home. If you're a retail investor and one of your stocks spikes after it agrees to be taken over, sell the stock. Don't get greedy and wait for that last dollar. And whatever you do, if you don't own the stock, don't buy it after the takeover has been announced.

In the wake of my last merger-arb blog entry, I got the following email from a reader, about Transmeridian Exploration, last seen trading at $1.29 per share:

Dear Mr, Salmon
I really need help on this. I bought ( $2.25 ) this stock on Dec 31 2007 when the news came out about the buyout opportunity.
I stupidly use all my money , ALL OF THEM !
Please give me some suggestion. When will this stock go up?
Should I sell part of it ?

I have to say I have no idea: maybe my readers can help? My gut feeling is that if a trade fails, you should cut your losses and get out before it gets worse. But there is an accepted takeover at $3 on the table: if the company does end up being taken over at that price, my reader will end up looking even sillier.

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