Sol Company has announced plans to acquire Luna Corporation by swapping 1.2 shares of Sol stock for each share of Luna stock.After the announcement,Sol traded for $41 per share,and Luna traded for $48 per share.Assuming the takeover is successful,which of the following is the most appropriate merger-arbitrage strategy?

Question

Quizplus · Accepted Answer

The correct strategy is to buy shares of the company being acquired (Luna) and short sell shares of the acquiring company (Sol) in the ratio of the swap. Since 1.2 shares of Sol are being swapped for each share of Luna, buying 100 shares of Luna and short selling 120 shares of Sol aligns with the swap ratio and aims to profit from the convergence of the two companies' share prices upon completion of the merger.

Sol Company Has Announced Plans to Acquire Luna Corporation by Swapping