Are merger failures before completion predictable for risk arbitrageurs?

Abstract

The principal objective of this dissertation is to establish if the failures of mergers before closing date are predictable in order to enhance Risk Arbitrageurs' portfolios. This paper examines the causes of mergers' failure ante-completion as predictors of the success. An empirical investigation of 92 cases of mergers or acquisitions failure during the year 1999 to 2002 leads to the conclusion that the major causes of break can be used as predicting tools for future failure but their efficiency is affected by unforeseen events and irrationality. The results indicate that thirteen reasons correlated to endogenous and exogenous outcomes cause mergers' failures. The three endogenous major factors affecting the deal completion represents about 30% of the risk, whereas the other factors that represents between 1 to 10% of risk are principally exogenous. The conclusion indicates that the probability assessment of merger's failure is subjective (except in perfect market and with rational investors) as the merger's failures are not predictable. However, as the risks affecting deal's completion are characterized and can be indexed, Risk Arbitrageurs can evaluate the likelihood of merger's success after analysing and evaluating each cause. In other words, applying and estimating the thirteen causes of failure is the closest approach to predict deal breaks and the best method to appraise a probability of success.