Arbageddon

	Members Registration Investors Careers

Become a sponsor »

Arbageddon refers to a significant event in the merger arbitrage market that occurred in 2014, when multiple high-profile merger deals collapsed simultaneously, causing substantial losses for merger arbitrage investors. The term is a portmanteau of "arbitrage" and "Armageddon," reflecting the severity of the market impact on merger arbitrage strategies.

History

The term "Arbageddon" gained prominence in October 2014, when two major merger deals collapsed within a short period, causing significant losses for merger arbitrage investors. This event was exacerbated by the announcement from President Barack Obama's administration that they would revisit rules on tax-driven mergers, also known as tax inversions.

Key Events

1. AbbVie-Shire Deal Collapse: The most significant deal to fall through was AbbVie's planned $55 billion acquisition of Shire, a Jersey-registered pharmaceutical company. When the U.S. government changed rules on taxing overseas profits, the incentive for this tax inversion deal evaporated, leading AbbVie to withdraw from the transaction. This announcement caused Shire's share price to drop by more than 25%.
2. Other Tax Inversion Deals: The AbbVie-Shire collapse had a contagion effect on approximately a dozen other tax inversion-focused deals that were yet to close, as well as the broader merger arbitrage market.
3. Regulatory Changes: President Obama's administration announced plans to revisit rules on tax-driven mergers, which added uncertainty to the market and contributed to the collapse of several deals.

Impact on Merger Arbitrage

The events of "Arbageddon" highlighted several key risks in merger arbitrage investing:

1. Fat Left-Tail Risk: The collapse of large deals can have a disproportionate impact on merger arbitrage indices and funds.
2. Contagion Risk: Multiple deals can fail simultaneously due to shared external factors, such as regulatory changes.
3. Systemic Risk: Changes in the business environment can affect multiple transactions across the market, leading to correlated failures.
4. Inadequate Risk Compensation: In some cases, the spread between the market price and the announced acquisition price may not adequately compensate for the risk of deal failure.

Lessons Learned

The "Arbageddon" event underscored the importance of active management and thorough risk assessment in merger arbitrage strategies. It demonstrated that relying solely on diversification and passive approaches may not provide adequate protection against systemic risks in the merger arbitrage market.

Legacy

The term "Arbageddon" has since been used to refer to periods of significant stress or multiple deal failures in the merger arbitrage market. It serves as a reminder of the potential risks involved in merger arbitrage strategies and the importance of careful deal selection and risk management.