Merger arbitrage is an investment strategy that seeks to profit from the price discrepancies that arise during corporate mergers and acquisitions. When a merger is announced, the target company’s stock typically trades below the proposed acquisition price, reflecting the market’s assessment of the deal’s uncertainty. Merger arbitrageurs aim to capitalize on this spread by taking positions that benefit if the merger is successfully completed.
In the case of the proposed Chevron-Hess merger, announced in 2023, Chevron plans to acquire Hess Corporation in an all-stock transaction. Under the terms of the agreement, Hess shareholders will receive 1.025 shares of Chevron for each Hess share they own.
To execute a merger arbitrage strategy in this scenario, an investor might purchase shares of Hess while simultaneously short-selling shares of Chevron. The goal is to profit from the convergence of Hess’s stock price to the implied acquisition value as the deal’s completion becomes more certain. However, this strategy carries risks, particularly if the merger faces obstacles or fails to materialize.
As of January 28, 2025, Hess Corporation’s stock is trading at $146.11 per share, while Chevron’s stock is priced at $157.23 per share. Given the agreed exchange ratio of 1.025 Chevron shares per Hess share, the implied value of Hess stock in the merger is approximately $161.11 per share (1.025 * $157.23). The current trading price of Hess is below this implied value, indicating a spread that reflects the market’s assessment of the merger’s completion risk.
