Calculator Inputs
Example Data Table
| Input | Example Value | Meaning |
|---|---|---|
| Current target price | 92.00 | Price paid for one target share. |
| Cash offer | 100.00 | Deal value if the merger closes. |
| Break price | 70.00 | Estimated target price if the deal fails. |
| Months to close | 6 | Expected time until closing. |
| Annual financing rate | 5% | Opportunity cost for capital during the trade. |
Formula Used
Success payoff = cash offer + exchange ratio × acquirer price + expected dividends - fees.
Failure payoff = estimated break price + expected dividends - fees.
Current cost = current target price + entry transaction cost.
Financed future cost = current cost × (1 + annual financing rate × years to close).
Implied probability = (financed future cost - failure payoff) ÷ (success payoff - failure payoff).
Expected value = your probability × success payoff + failure probability × failure payoff.
How To Use This Calculator
- Enter the current target share price.
- Add the cash offer and any stock consideration.
- Estimate the break price if the deal fails.
- Enter the expected months until closing.
- Add financing, dividend, hedge, and transaction assumptions.
- Enter your own success probability for expected value analysis.
- Press calculate and review the result above the form.
- Download the CSV or PDF summary for records.
Merger Arbitrage Probability Analysis
Understanding The Spread
Merger arbitrage looks simple at first. A target trades below the deal value. The gap is the spread. Yet that spread carries several messages. It may reflect regulatory risk, financing risk, timing risk, shareholder risk, or market stress. This calculator turns those moving parts into an implied probability estimate.
Why The Spread Matters
The market price is not only a discount. It is a blended signal. Investors compare the success payoff with the failure payoff. They also consider the time needed to close the deal. A long closing period can reduce annualized return. A small spread can still be attractive if the closing date is near. A wide spread can be dangerous if the break price is very low.
Using Failure Value Carefully
The break price is often the hardest input. It should not be guessed casually. Analysts may review the target price before the announcement, sector multiples, earnings changes, and market movement. A conservative break price can prevent false confidence. It also shows how much capital may be lost if the transaction fails.
Carrying Costs And Deal Terms
Advanced arbitrage work includes more than headline offer price. Cash deals, stock deals, and mixed deals create different payoffs. Dividends, hedging costs, financing costs, and trading fees can change the fair spread. A stock deal also depends on the acquirer share price and exchange ratio. That is why the calculator separates cash consideration from share consideration.
Reading The Result
An implied probability near the analyst’s own probability can mean the market is fairly pricing the risk. A lower market probability may show an opportunity. A higher market probability may show limited upside. The expected value result helps compare your own view with the market’s view.
Practical Use
Use this tool before entering a position, updating a thesis, or comparing multiple deals. Change one assumption at a time. Watch how probability changes when the break price, closing period, or fee assumptions move. The output is not investment advice. It is a structured decision aid for understanding the risk embedded in a merger spread. Review saved outputs after each update, because small assumption changes can alter sizing, hedge choices, and whether the apparent spread still compensates risk properly today.
FAQs
What is merger arbitrage implied probability?
It is the success probability suggested by the current spread between the market price, deal payoff, and estimated failure value.
Why does the break price matter?
The break price controls downside risk. A lower break price usually requires a higher success probability to justify the current market price.
Can this calculator handle stock deals?
Yes. Enter the exchange ratio and acquirer share price. The tool adds that stock value to the cash consideration.
What does a probability above 100% mean?
It means the market price is above the modeled payoff range. Your inputs may need review, especially failure value, fees, or offer terms.
What does a negative implied probability mean?
It means the current price is below the modeled failure-adjusted value. This can happen when assumptions are too conservative or markets are stressed.
Should dividends be included?
Include dividends expected before closing if the target holder receives them. They can improve both success and failure payoff estimates.
Is annualized return always reliable?
Annualized return is sensitive to closing time. A small timing change can strongly alter the annualized number, especially for near-term deals.
Is this calculator investment advice?
No. It is an analytical tool. Use it with filings, deal terms, risk research, and independent judgment before making decisions.