There are two main types of equity merger arbitrage deal structures in a cash deal.

The acquiring company offers a fixed amount of cash per share.

These are straightforward.

If the deal succeeds, target shareholders receive cash, so the final value is easy to calculate.

In a share for share deal, the acquiring company offers its stock as payments.

For example, a fixed number of big ink shares for each small ink share.

Here, the value of the consideration depends on the acquirer's share price, which fluctuates daily.

To calculate the deal, parity, the current value of the offer.

Investors multiply the exchange ratio by big's current share price.

In both cases, the core principle is the same.

Compare the market price of the target to the value implied by the offer and decide whether the difference compensates for the risk sufficiently.

Once a deal is announced and the initial market reaction settles, arbitrages move quickly through a structured evaluation process.

They start by reviewing the deal terms, gathering details from company filings, presentations, and regulatory announcements to understand exactly what is being offered and under what conditions.

Next, they calculate the deal parity or the fair value of the package being offered.

Cash deals are simple.

While share deals require tracking the acquirer's share price to value the consideration accurately, then they estimate the timeline, how long the transaction is likely to take to close.

This determines how long their capital will be tied up and allows them to annualize the potential return.

Finally, they assess risks, regulatory financing, and shareholder risks as well as possible upside scenarios.

For example, a rival bidder stepping in and triggering a bidding wall.

In essence, merger arbitrage is about balancing risk and reward, earning the spread between today's price and the offer value while managing the possibility that the deal fails or changes.

It's one of the most sophisticated forms of event-driven investing requiring a deep understanding of corporate transactions, market behavior, and probability.

But at its heart, it all comes down to a simple question, what is the market paying me for taking on this deal risk? And is it enough?