Arbitrage and Special Situations

There are often periods of time when there are no “fat pitches” available for us to invest our cash. Instead of taking a risk on an overpriced stock or one with no moats, we can look for low risk opportunities in arbitrage and special situations.

Arbitrage involves the matching of two assets that creates a risk neutral opportunity for profit. For example, merger arbitrage could involve the purchase of stock in the company being acquired while simultaneously shorting the stock of the acquirer. In most situations today, the market is pretty efficient at analyzing merger opportunities, so the opportunity for small investors to find profit here is pretty small. However, cash offers for small companies can often provide good rates of return, since the big boys might not be interested or able to take advantage of these opportunities.

Special situations involve a large variety of corporate activities such as spinoffs, bankruptcies, liquidations, recapitalizations, and restructurings. As a small investor, I find that cash tender offers for odd lots or for small companies going private offer the best opportunities. Spinoffs can also offer value opportunities, since often major holders of the stock, such as index funds, are required to sell off the shares of the new company they receive.

Warren Buffett took advantage of these opportunities in the early part of his investment career. While many of the opportunities Buffett found might not be available in today’s information age, there are still some opportunities available for the small investor. I’ve listed some resources regarding arbitrage and special situations below. Please let me know of any others that you have found.

I’ve read a couple of useful articles regarding arbitrage and special situations. provides a good introduction to risk arbitrage. Accompanying that article, there is a useful merger arbitrage model spreadsheet.

Joshua Kennon from Investing for Beginners also has an informative article entitled, “Risk Arbitrage – Profiting from Mergers, Acquisitions and Liquidations“.

Message Boards provide a great source of information on new arbitrage and special situation opportunities. Here are some of my favorites:

Researching your own arbitrage and special situation opportunities can be somewhat difficult and time consuming. I’ve pulled together the following list of filings and announcements that might be helpful:

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