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95-401: Broadly speaking, StatArb is actually any strategy that is bottom-up, beta -neutral in approach and uses statistical/econometric techniques in order to provide signals for execution. Signals are often generated through a contrarian mean reversion principle but can also be designed using such factors as lead/lag effects, corporate activity, short-term momentum , etc. This is usually referred to as

190-554: A ) Var ⁡ ( r b ) {\displaystyle \rho _{a,b}\equiv {\frac {\operatorname {Cov} (r_{a},r_{b})}{\sqrt {\operatorname {Var} (r_{a})\operatorname {Var} (r_{b})}}}} , market beta can also be written as where ρ i , m {\displaystyle \rho _{i,m}} is the correlation of the two returns, and σ i {\displaystyle \sigma _{i}} , σ m {\displaystyle \sigma _{m}} are

285-689: A monopoly ", and the Hart–Scott–Rodino Act requires notifying the U.S. Department of Justice 's Antitrust Division and the Federal Trade Commission about any merger or acquisition over a certain size. An acquisition/takeover is the purchase of one business or company by another company or other business entity. Specific acquisition targets can be identified through myriad avenues, including market research, trade expos, sent up from internal business units, or supply chain analysis. Such purchase may be of 100%, or nearly 100%, of

380-405: A business retain just a handful of key players that would have otherwise left. Organizations should move rapidly to re-recruit key managers. It's much easier to succeed with a team of quality players that one selects deliberately rather than try to win a game with those who randomly show up to play. Mergers and acquisitions often create brand problems, beginning with what to call the company after

475-569: A business, which accrues to both categories of stakeholders, is called the Enterprise Value (EV), whereas the value which accrues just to shareholders is the Equity Value (also called market capitalization for publicly listed companies). Enterprise Value reflects a capital structure neutral valuation and is frequently a preferred way to compare value as it is not affected by a company's, or management's, strategic decision to fund

570-406: A finite period of time, a low probability market movement may impose heavy short-term losses. If such short-term losses are greater than the investor's funding to meet interim margin calls, its positions may need to be liquidated at a loss even when its strategy's modeled forecasts ultimately turn out to be correct. The 1998 default of Long-Term Capital Management was a widely publicized example of

665-473: A function of their acquisition activity. Therefore, additional motives for merger and acquisition that may not add shareholder value include: The M&A process itself is a multifaceted which depends upon the type of merging companies. The M&A process results in the restructuring of a business's purpose, corporate governance and brand identity. An arm's length merger is a merger: ″The two elements are complementary and not substitutes. The first element

760-443: A fund that failed due to its inability to post collateral to cover adverse market fluctuations. Statistical arbitrage is also subject to model weakness as well as stock- or security-specific risk. The statistical relationship on which the model is based may be spurious, or may break down due to changes in the distribution of returns on the underlying assets. Factors, which the model may not be aware of having exposure to, could become

855-433: A larger and/or longer-established company and retain the name of the latter for the post-acquisition combined entity. This is known as a reverse takeover . Another type of acquisition is the reverse merger , a form of transaction that enables a private company to be publicly listed in a relatively short time frame. A reverse merger is a type of merger where a privately held company, typically one with promising prospects and

950-579: A legal and financial point of view, both mergers and acquisitions generally result in the consolidation of assets and liabilities under one entity, and the distinction between the two is not always clear. Most countries require mergers and acquisitions to comply with antitrust or competition law . In the United States , for example, the Clayton Act outlaws any merger or acquisition that may "substantially lessen competition" or "tend to create

1045-487: A measure of the appropriate expected rate of return. Due to the fact that the overall rate of return on the firm is weighted rate of return on its debt and its equity, the market-beta of the overall unlevered firm is the weighted average of the firm's debt beta (often close to 0) and its levered equity beta. In fund management, adjusting for exposure to the market separates out the component that fund managers should have received given that they had their specific exposure to

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1140-426: A merger or acquisition transaction can range from political to tactical. Ego can drive choice just as well as rational factors such as brand value and costs involved with changing brands. Beyond the bigger issue of what to call the company after the transaction comes the ongoing detailed choices about what divisional, product and service brands to keep. The detailed decisions about the brand portfolio are covered under

1235-436: A merger, a tender offer or a hostile takeover. As an aspect of strategic management , M&A can allow enterprises to grow or downsize , and change the nature of their business or competitive position. Technically, a merger is the legal consolidation of two business entities into one, whereas an acquisition occurs when one entity takes ownership of another entity's share capital , equity interests or assets . From

1330-493: A multi-factor approach to StatArb. Because of the large number of stocks involved, the high portfolio turnover and the fairly small size of the effects one is trying to capture, the strategy is often implemented in an automated fashion and great attention is placed on reducing trading costs. Statistical arbitrage has become a major force at both hedge funds and investment banks. Many bank proprietary operations now center to varying degrees around statistical arbitrage trading. As

1425-444: A need for financing, acquires a publicly listed shell company that has few assets and no significant business operations. The combined evidence suggests that the shareholders of acquired firms realize significant positive "abnormal returns," while shareholders of the acquiring company are most likely to experience a negative wealth effect. Most studies indicate that M&A transactions have a positive net effect, with investors in both

1520-488: A portfolio of a hundred or more stocks—some long, some short—that are carefully matched by sector and region to eliminate exposure to beta and other risk factors. Portfolio construction is automated and consists of two phases. In the first or "scoring" phase, each stock in the market is assigned a numeric score or rank that reflects its desirability; high scores indicate stocks that should be held long and low scores indicate stocks that are candidates for shorting. The details of

1615-434: A situation where one company splits into two, generating a second company which may or may not become separately listed on a stock exchange. As per knowledge-based views, firms can generate greater values through the retention of knowledge-based resources which they generate and integrate. Extracting technological benefits during and after acquisition is an ever-challenging issue because of organizational differences. Based on

1710-550: A special committee of independent directors; and 2) conditioned on an affirmative vote of a majority of the minority stockholders, the business judgment standard of review should presumptively apply, and any plaintiff ought to have to plead particularized facts that, if true, support an inference that, despite the facially fair process, the merger was tainted because of fiduciary wrongdoing.″ A Strategic merger usually refers to long-term strategic holding of target (Acquired) firm. This type of M&A process aims at creating synergies in

1805-678: A specific fund to a holder of the mutual fund benchmark portfolio, rather than the risk of adding the fund to a portfolio of the market. Utility stocks commonly show up as examples of low beta. These have some similarity to bonds, in that they tend to pay consistent dividends, and their prospects are not strongly dependent on economic cycles. They are still stocks, so the market price will be affected by overall stock market trends, even if this does not make sense. Foreign stocks may provide some diversification. World benchmarks such as S&P Global 100 have slightly lower betas than comparable US-only benchmarks such as S&P 100 . However, this effect

1900-468: A total value of US$ 2,164.4 bil. Some of the largest mergers of equals took place during the dot-com bubble of the late 1990s and in the year 2000: AOL and Time Warner (US$ 164 bil.), SmithKline Beecham and Glaxo Wellcome (US$ 75 bil.), Citicorp and Travelers Group (US$ 72 bil.). More recent examples this type of combinations are DuPont and Dow Chemical (US$ 62 bil.) and Praxair and Linde (US$ 35 bil.). An analysis of 1,600 companies across industries revealed

1995-411: A trading strategy, statistical arbitrage is a heavily quantitative and computational approach to securities trading. It involves data mining and statistical methods, as well as the use of automated trading systems. Historically, StatArb evolved out of the simpler pairs trade strategy, in which stocks are put into pairs by fundamental or market-based similarities. When one stock in a pair outperforms

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2090-403: Is This suggests that an asset with β {\displaystyle \beta } greater than 1 increases the portfolio variance, while an asset with β {\displaystyle \beta } less than 1 decreases it if added in a small amount. Market-beta can be weighted, averaged, added, etc. That is, if a portfolio consists of 80% asset A and 20% asset B, then

2185-456: Is friendly or hostile . Achieving acquisition success has proven to be very difficult, while various studies have shown that 50% of acquisitions were unsuccessful. "Serial acquirers" appear to be more successful with M&A than companies who make acquisitions only occasionally (see Douma & Schreuder, 2013, chapter 13). The new forms of buy out created since the crisis are based on serial type acquisitions known as an ECO Buyout which

2280-478: Is a co-community ownership buy out and the new generation buy outs of the MIBO (Management Involved or Management & Institution Buy Out) and MEIBO (Management & Employee Involved Buy Out). Whether a purchase is perceived as being "friendly" or "hostile" depends significantly on how the proposed acquisition is communicated to and perceived by the target company's board of directors, employees, and shareholders. It

2375-426: Is a triangular merger, where the target company merges with a shell company wholly owned by the buyer, thus becoming a subsidiary of the buyer. In a "forward triangular merger ", the target company merges into the subsidiary, with the subsidiary as the surviving company of the merger; a "reverse triangular merger" is similar except that the subsidiary merges into the target company, with the target company surviving

2470-512: Is an unbiased error term whose squared error should be minimized. The coefficient α i {\displaystyle \alpha _{i}} is often referred to as the alpha . The ordinary least squares solution is: where Cov {\displaystyle \operatorname {Cov} } and Var {\displaystyle \operatorname {Var} } are the covariance and variance operators. Betas with respect to different market indexes are not comparable. By using

2565-425: Is between two competitors in the same industry. A vertical merger occurs when two firms combine across the value chain, such as when a firm buys a former supplier (backward integration) or a former customer (forward integration). When there is no strategic relatedness between an acquiring firm and its target, this is called a conglomerate merger (Douma & Schreuder, 2013). The form of merger most often employed

2660-399: Is combined into another entity by operation of the corporate law statute(s) of the jurisdiction of the merging entities. In a transaction structured as a merger or an equity purchase, the buyer acquires all of the assets and liabilities of the acquired entity. In a transaction structured as an asset purchase, the buyer and seller agree on which assets and liabilities the buyer will acquire from

2755-425: Is complete, the parties may proceed to draw up a definitive agreement, known as a "merger agreement", "share purchase agreement," or "asset purchase agreement" depending on the structure of the transaction. Such contracts are typically 80 to 100 pages long and focus on five key types of terms: Following the closing of a deal, adjustments may be made to some of the provisions outlined in the purchase agreement, such as

2850-490: Is defined by (and best obtained via) a linear regression of the rate of return r i , t {\displaystyle r_{i,t}} of asset i {\displaystyle i} on the rate of return r m , t {\displaystyle r_{m,t}} of the (typically value-weighted) stock-market index m {\displaystyle m} : where ε t {\displaystyle \varepsilon _{t}}

2945-404: Is difficult to explain unless there was a common risk factor. While the reasons are not yet fully understood, several published accounts blame the emergency liquidation of a fund that experienced capital withdrawals or margin calls . By closing out its positions quickly, the fund put pressure on the prices of the stocks it was long and short. Because other StatArb funds had similar positions, due to

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3040-426: Is important because the directors have the capability to act as effective and active bargaining agents, which disaggregated stockholders do not. But, because bargaining agents are not always effective or faithful, the second element is critical, because it gives the minority stockholders the opportunity to reject their agents' work. Therefore, when a merger with a controlling stockholder was: 1) negotiated and approved by

3135-586: Is itself a risk factor, one that is relatively new and thus was not taken into account by the StatArb models. These events showed that StatArb has developed to a point where it is a significant factor in the marketplace, that existing funds have similar positions and are in effect competing for the same returns. Simulations of simple StatArb strategies by Khandani and Lo show that the returns to such strategies have been reduced considerably from 1998 to 2007, presumably because of competition. It has also been argued that

3230-601: Is more volatile than the market. In practice, few stocks have negative betas (tending to go up when the market goes down). Most stocks have betas between 0 and 3. Most fixed income instruments and commodities tend to have low or zero betas; call options tend to have high betas; and put options and short positions and some inverse ETFs tend to have negative betas. The market beta β i {\displaystyle \beta _{i}} of an asset i {\displaystyle i} , observed on t {\displaystyle t} occasions,

3325-414: Is necessary. On a stock-specific level, there is risk of M&A activity or even default for an individual name. Such an event would immediately invalidate the significance of any historical relationship assumed from empirical statistical analysis of the past data. During July and August 2007, a number of StatArb (and other Quant type) hedge funds experienced significant losses at the same time, which

3420-412: Is normal for M&A deal communications to take place in a so-called "confidentiality bubble," wherein the flow of information is restricted pursuant to confidentiality agreements. In the case of a friendly transaction, the companies cooperate in negotiations; in the case of a hostile deal, the board and/or management of the target is unwilling to be bought or the target's board has no prior knowledge of

3515-449: Is not as good as it used to be; the various markets are now fairly correlated, especially the US and Western Europe. Derivatives are examples of non-linear assets. Whereas Beta relies on a linear model, an out of the money option will have a distinctly non-linear payoff. In these cases, then, the change in price of an option relative to the change in the price of its underlying asset

3610-426: Is not constant. (True also - but here, far less pronounced - for volatility , time to expiration , and other factors .) Thus "beta" here, calculated traditionally, would vary constantly as the price of the underlying changed. Accommodating this, mathematical finance defines a specific volatility beta . Here, analogous to the above, this beta represents the covariance between the derivative's return and changes in

3705-445: Is not necessarily indicative of dependence. As more competitors enter the market, and funds diversify their trades across more platforms than StatArb, a point can be made that there should be no reason to expect the platform models to behave anything like each other. Their statistical models could be entirely independent. Statistical arbitrage faces different regulatory situations in different countries or markets. In many countries where

3800-415: Is possible only when resources are exchanged and managed without affecting their independence. A corporate acquisition can be structured legally as either an "asset purchase" in which the seller sells business assets and liabilities to the buyer, an "equity purchase" in which the buyer purchases equity interests in a target company from one or more selling shareholders or a "merger" in which one legal entity

3895-464: Is provided by full-service investment banks- who often advise and handle the biggest deals in the world (called bulge bracket ) - and specialist M&A firms, who provide M&A only advisory, generally to mid-market, select industries and SBEs. Highly focused and specialized M&A advice investment banks are called boutique investment banks . The dominant rationale used to explain M&;A activity

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3990-487: Is that acquiring firms seek improved financial performance or reduce risk. The following motives are considered to improve financial performance or reduce risk: Megadeals—deals of at least one $ 1 billion in size—tend to fall into four discrete categories: consolidation, capabilities extension, technology-driven market transformation, and going private. On average and across the most commonly studied variables, acquiring firms' financial performance does not positively change as

4085-534: The Hudson's Bay Company merged with the rival North West Company . The Great Merger Movement was a predominantly U.S. business phenomenon that happened from 1895 to 1905. During this time, small firms with little market share consolidated with similar firms to form large, powerful institutions that dominated their markets, such as the Standard Oil Company , which at its height controlled nearly 90% of

4180-509: The capital asset pricing model (CAPM). Practitioners tend to prefer to work with the S&;P 500 due to its easy in-time availability and availability to hedge with stock index futures. In the idealized CAPM, beta risk is the only kind of risk for which investors should receive an expected return higher than the risk-free rate of interest . When used within the context of the CAPM, beta becomes

4275-410: The stock market as a whole. Beta can be used to indicate the contribution of an individual asset to the market risk of a portfolio when it is added in small quantity. It refers to an asset's non-diversifiable risk , systematic risk , or market risk. Beta is not a measure of idiosyncratic risk . Beta is the hedge ratio of an investment with respect to the stock market. For example, to hedge out

4370-800: The Great Merger Movement were able to keep their dominance in their respective sectors through 1929, and in some cases today, due to growing technological advances of their products, patents , and brand recognition by their customers. There were also other companies that held the greatest market share in 1905 but at the same time did not have the competitive advantages of the companies like DuPont and General Electric . These companies such as International Paper and American Chicle saw their market share decrease significantly by 1929 as smaller competitors joined forces with each other and provided much more competition. The companies that merged were mass producers of homogeneous goods that could exploit

4465-450: The acquiring company's stock, issued to the shareholders of the acquired company at a given ratio proportional to the valuation of the latter. They receive stock in the company that is purchasing the smaller subsidiary. There are some elements to think about when choosing the form of payment. When submitting an offer, the acquiring firm should consider other potential bidders and think strategically. The form of payment might be decisive for

4560-512: The acquisition so the team can focus on projects for their new employer). In recent years, these types of acquisitions have become common in the technology industry, where major web companies such as Facebook , Twitter , and Yahoo! have frequently used talent acquisitions to add expertise in particular areas to their workforces. Merger of equals is often a combination of companies of a similar size. Since 1990, there have been more than 625 M&A transactions announced as mergers of equals with

4655-514: The assets and liabilities that pertain solely to the unit being sold, determining whether the unit relies on services from other parts of the seller's organization, transferring employees, moving permits and licenses, and safeguarding against potential competition from the seller in the same business sector after the transaction is completed. From an economic point of view, business combinations can also be classified as horizontal, vertical and conglomerate mergers (or acquisitions). A horizontal merger

4750-581: The assets or ownership equity of the acquired entity. A consolidation/amalgamation occurs when two companies combine to form a new enterprise altogether, and neither of the previous companies remains independently owned. Acquisitions are divided into "private" and "public" acquisitions, depending on whether the acquiree or merging company (also termed a target ) is or is not listed on a public stock market . Some public companies rely on acquisitions as an important value creation strategy. An additional dimension or categorization consists of whether an acquisition

4845-451: The best forecast of the true prevailing beta most indicative of the most likely future beta realization and not in the historical market-beta . Despite these problems, a historical beta estimator remains an obvious benchmark predictor. It is obtained as the slope of the fitted line from the linear least-squares estimator. The OLS regression can be estimated on 1–5 years worth of daily, weekly or monthly stock returns. The choice depends on

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4940-421: The beta of the portfolio is 80% times the beta of asset A and 20% times the beta of asset B. In practice, the choice of index makes relatively little difference in the market betas of individual assets, because broad value-weighted market indexes tend to move closely together. Academics tend to prefer to work with a value-weighted market portfolio due to its attractive aggregation properties and its close link with

5035-446: The business either through debt, equity, or a portion of both. Five common ways to "triangulate" the enterprise value of a business are: Professionals who value businesses generally do not use just one method, but a combination. Valuations implied using these methodologies can prove different to a company's current trading valuation. For public companies, the market based enterprise value and equity value can be calculated by referring to

5130-482: The buyer and target companies seeing positive returns. This suggests that M&A creates economic value, likely by transferring assets to more efficient management teams who can better utilize them. (See Douma & Schreuder, 2013, chapter 13). There are also a variety of structures used in securing control over the assets of a company, which have different tax and regulatory implications: The terms " demerger ", " spin-off " and "spin-out" are sometimes used to indicate

5225-469: The buyer. Hence, the analysis should be done from the acquiring firm's point of view. Synergy-creating investments are started by the choice of the acquirer, and therefore they are not obligatory, making them essentially real options . To include this real options aspect into analysis of acquisition targets is one interesting issue that has been studied lately. See also contingent value rights . Mergers are generally differentiated from acquisitions partly by

5320-462: The company's current account), liquidity ratios might decrease. On the other hand, in a pure stock for stock transaction (financed from the issuance of new shares), the company might show lower profitability ratios (e.g. ROA). However, economic dilution must prevail towards accounting dilution when making the choice. The form of payment and financing options are tightly linked. If the buyer pays cash, there are three main financing options: M&A advice

5415-469: The company's share price and components on its balance sheet. The valuation methods described above represent ways to determine value of a company independently from how the market currently, or historically, has determined value based on the price of its outstanding securities. Most often value is expressed in a Letter of Opinion of Value (LOV) when the business is being valued informally. Formal valuation reports generally get more detailed and expensive as

5510-420: The content analysis of seven interviews, the authors concluded the following components for their grounded model of acquisition: An increase in acquisitions in the global business environment requires enterprises to evaluate the key stake holders of acquisitions very carefully before implementation. It is imperative for the acquirer to understand this relationship and apply it to its advantage. Employee retention

5605-430: The control of the buyer modified. If the issuance of shares is necessary, shareholders of the acquiring company might prevent such capital increase at the general meeting of shareholders. The risk is removed with a cash transaction. Then, the balance sheet of the buyer will be modified and the decision maker should take into account the effects on the reported financial results. For example, in a pure cash deal (financed from

5700-405: The efficiencies of large volume production. In addition, many of these mergers were capital-intensive. Due to high fixed costs, when demand fell, these newly merged companies had an incentive to maintain output and reduce prices. However more often than not mergers were "quick mergers". These "quick mergers" involved mergers of companies with unrelated technology and different management. As a result,

5795-468: The efficiency gains associated with mergers were not present. The new and bigger company would actually face higher costs than competitors because of these technological and managerial differences. Thus, the mergers were not done to see large efficiency gains, they were in fact done because that was the trend at the time. Companies which had specific fine products, like fine writing paper, earned their profits on high margin rather than volume and took no part in

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5890-528: The events during August 2007 were linked to reduction of liquidity, possibly due to risk reduction by high-frequency market makers during that time. It is a noteworthy point of contention, that the common reduction in portfolio value could also be attributed to a causal mechanism. The 2007-2008 financial crisis also occurred at this time. Many, if not the vast majority, of investors of any form, booked losses during this one year time frame. The association of observed losses at hedge funds using statistical arbitrage

5985-473: The global oil refinery industry. It is estimated that more than 1,800 of these firms disappeared into consolidations, many of which acquired substantial shares of the markets in which they operated. The vehicle used were so-called trusts . In 1900 the value of firms acquired in mergers was 20% of GDP . In 1990 the value was only 3% and from 1998 to 2000 it was around 10–11% of GDP. Companies such as DuPont , U.S. Steel , and General Electric that merged during

6080-474: The instant prevailing market-beta. When long-term market-betas are required, further regression toward the mean over long horizons should be considered. Mergers and acquisitions Mergers and acquisitions ( M&A ) are business transactions in which the ownership of companies , business organizations , or their operating units are transferred to or consolidated with another company or business organization. This could happen through direct absorption,

6175-440: The long run by increased market share, broad customer base, and corporate strength of business. A strategic acquirer may also be willing to pay a premium offer to target firm in the outlook of the synergy value created after M&A process. The term "acqui-hire" is used to refer to acquisitions where the acquiring company seeks to obtain the target company's talent, rather than their products (which are often discontinued as part of

6270-436: The market stabilization mechanisms (e.g. daily limit) set heavy obstacles when either individual investors or institutional investors try to implement the trading strategy implied by statistical arbitrage theory. Beta (finance) In finance , the beta ( β or market beta or beta coefficient ) is a statistic that measures the expected increase or decrease of an individual stock price in proportion to movements of

6365-410: The market-risk of a stock with a market beta of 2.0, an investor would short $ 2,000 in the stock market for every $ 1,000 invested in the stock. Thus insured, movements of the overall stock market no longer influence the combined position on average. Beta measures the contribution of an individual investment to the risk of the market portfolio that was not reduced by diversification . It does not measure

6460-510: The market. For example, if the stock market went up by 20% in a given year, and a manager had a portfolio with a market-beta of 2.0, this portfolio should have returned 40% in the absence of specific stock picking skills. This is measured by the alpha in the market-model, holding beta constant. Occasionally, other betas than market-betas are used. The arbitrage pricing theory (APT) has multiple factors in its model and thus requires multiple betas. (The CAPM has only one risk factor , namely

6555-440: The merger. Mergers, asset purchases and equity purchases are each taxed differently, and the most beneficial structure for tax purposes is highly situation-dependent. Under the U.S. Internal Revenue Code , a forward triangular merger is taxed as if the target company sold its assets to the shell company and then liquidated, them whereas a reverse triangular merger is taxed as if the target company's shareholders sold their stock in

6650-429: The most value from a business assessment, objectives should be clearly defined and the right resources should be chosen to conduct the assessment in the available timeframe. As synergy plays a large role in the valuation of acquisitions, it is paramount to get the value of synergies right; as briefly alluded to re DCF valuations. Synergies are different from the "sales price" valuation of the firm, as they will accrue to

6745-417: The offer. Hostile acquisitions can, and often do, ultimately become "friendly" as the acquirer secures endorsement of the transaction from the board of the acquiree company. This usually requires an improvement in the terms of the offer and/or through negotiation. "Acquisition" usually refers to a purchase of a smaller firm by a larger one. Sometimes, however, a smaller firm will acquire management control of

6840-576: The other, the under performing stock is bought long and the outperforming stock is sold short with the expectation that under performing stock will climb towards its outperforming partner. Mathematically speaking, the strategy is to find a pair of stocks with high correlation , cointegration , or other common factor characteristics. Various statistical tools have been used in the context of pairs trading ranging from simple distance-based approaches to more complex tools such as cointegration and copula concepts. StatArb considers not pairs of stocks but

6935-407: The overall market, and thus works only with the plain beta.) For example, a beta with respect to oil price changes would sometimes be called an "oil-beta" rather than "market-beta" to clarify the difference. Betas commonly quoted in mutual fund analyses often measure the exposure to a specific fund benchmark, rather than to the overall stock market. Such a beta would measure the risk from adding

7030-446: The purchase price. These adjustments are subject to enforceability issues in certain situations. Alternatively, certain transactions use the 'locked box' approach, where the purchase price is fixed at signing and based on the seller's equity value at a pre-signing date and an interest charge. The assets of a business are pledged to two categories of stakeholders: equity owners and owners of the business' outstanding debt. The core value of

7125-423: The relationship between standard deviation and variance , σ ≡ Var ⁡ ( r ) {\displaystyle \sigma \equiv {\sqrt {\operatorname {Var} (r)}}} and the definition of correlation ρ a , b ≡ Cov ⁡ ( r a , r b ) Var ⁡ ( r

7220-426: The respective volatilities . This equation shows that the idiosyncratic risk ( σ i {\displaystyle \sigma _{i}} ) is related to but often very different to market beta. If the idiosyncratic risk is 0 (i.e., the stock returns do not move), so is the market-beta. The reverse is not the case: A coin toss bet has a zero beta but not zero risk. Attempts have been made to estimate

7315-446: The rewards for M&A activity were greater for consumer products companies than the average company. For the period 2000–2010, consumer products companies turned in an average annual TSR of 7.4%, while the average for all companies was 4.8%. Given that the cost of replacing an executive can run over 100% of his or her annual salary, any investment of time and energy in re-recruitment will likely pay for itself many times over if it helps

7410-439: The risk when an investment is held on a stand-alone basis. The beta of an asset is compared to the market as a whole, usually the S&P 500 . By definition, the value-weighted average of all market-betas of all investable assets with respect to the value-weighted market index is 1. If an asset has a beta above 1, it indicates that its return moves more than 1-to-1 with the return of the market-portfolio, on average; that is, it

7505-648: The scoring formula vary and are highly proprietary, but, generally (as in pairs trading), they involve a short term mean reversion principle so that, e.g., stocks that have done unusually well in the past week receive low scores and stocks that have underperformed receive high scores. In the second or "risk reduction" phase, the stocks are combined into a portfolio in carefully matched proportions so as to eliminate, or at least greatly reduce, market and factor risk. This phase often uses commercially available risk models like MSCI/Barra , APT, Northfield, Risk Infotech, and Axioma to constrain or eliminate various risk factors. Over

7600-448: The seller. Asset purchases are common in technology transactions in which the buyer is most interested in particular intellectual property but does not want to acquire liabilities or other contractual relationships. An asset purchase structure may also be used when the buyer wishes to buy a particular division or unit of a company that is not a separate legal entity. Divestitures present a variety of unique challenges, such as identifying

7695-442: The seller. With pure cash deals, there is no doubt on the real value of the bid (without considering an eventual earnout). The contingency of the share payment is indeed removed. Thus, a cash offer preempts competitors better than securities. Taxes are a second element to consider and should be evaluated with the counsel of competent tax and accounting advisers. Third, with a share deal the buyer's capital structure might be affected and

7790-430: The set of possible stock return realizations. The true market-beta is essentially the average outcome if infinitely many draws could be observed. On average, the best forecast of the realized market-beta is also the best forecast of the true market-beta. Estimators of market-beta have to wrestle with two important problems. First, the underlying market betas are known to move over time. Second, investors are interested in

7885-414: The significant drivers of price action in the markets, and the inverse applies also. The existence of the investment based upon model itself may change the underlying relationship, particularly if enough entrants invest with similar principles. The exploitation of arbitrage opportunities themselves increases the efficiency of the market, thereby reducing the scope for arbitrage, so continual updating of models

7980-426: The similarity of their alpha models and risk-reduction models, the other funds experienced adverse returns. One of the versions of the events describes how Morgan Stanley 's highly successful StatArb fund, PDT , decided to reduce its positions in response to stresses in other parts of the firm, and how this contributed to several days of hectic trading. In a sense, the fact of a stock being heavily involved in StatArb

8075-414: The size of a company increases, but this is not always the case as the nature of the business and the industry it is operating in can influence the complexity of the valuation task. Objectively evaluating the historical and prospective performance of a business is a challenge faced by many. Generally, parties rely on independent third parties to conduct due diligence studies or business assessments. To yield

8170-490: The target company to the buyer. The documentation of an M&A transaction often begins with a letter of intent . The letter of intent generally does not bind the parties to commit to a transaction, but may bind the parties to confidentiality and exclusivity obligations so that the transaction can be considered through a due diligence process involving lawyers, accountants, tax advisors, and other professionals, as well as business people from both sides. After due diligence

8265-413: The terms in δ 2 {\displaystyle \delta ^{2}} can be ignored, Using the definition of β i = Cov ⁡ ( r m , r i ) / Var ⁡ ( r m ) , {\displaystyle \beta _{i}=\operatorname {Cov} (r_{m},r_{i})/\operatorname {Var} (r_{m}),} this

8360-449: The three ingredient components separately, but this has not led to better estimates of market-betas. Suppose an investor has all his money in the market m {\displaystyle m} and wishes to move a small amount into asset class i {\displaystyle i} . The new portfolio is defined by The variance can be computed as For small values of δ {\displaystyle \delta } ,

8455-658: The topic brand architecture . Most histories of M&A begin in the late 19th century United States. However, mergers coincide historically with the existence of companies. In 1708, for example, the East India Company merged with an erstwhile competitor to restore its monopoly over the Indian trade. In 1784, the Italian Monte dei Paschi and Monte Pio banks were united as the Monti Reuniti. In 1821,

8550-410: The trade off between accuracy of beta measurement (longer periodic measurement times and more years give more accurate results) and historic firm beta changes over time (for example, due to changing sales products or clients). Other beta estimators reflect the tendency of betas (like rates of return) for regression toward the mean , induced not only by measurement error but also by underlying changes in

8645-417: The trading security or derivatives are not fully developed, investors find it infeasible or unprofitable to implement statistical arbitrage in local markets. In China, quantitative investment including statistical arbitrage is not the mainstream approach to investment. A set of market conditions restricts the trading behavior of funds and other financial institutions. The restriction on short selling as well as

8740-547: The transaction and going down into detail about what to do about overlapping and competing product brands. Decisions about what brand equity to write off are not inconsequential. And, given the ability for the right brand choices to drive preference and earn a price premium, the future success of a merger or acquisition depends on making wise brand choices. Brand decision-makers essentially can choose from four different approaches to dealing with naming issues, each with specific pros and cons: The factors influencing brand decisions in

8835-690: The true beta and/or historical randomness. (Intuitively, one would not suggest a company with high return [e.g., a drug discovery] last year also to have as high a return next year.) Such estimators include the Blume/Bloomberg beta (used prominently on many financial websites), the Vasicek beta, the Scholes–Williams beta, the Dimson beta, and the Welch beta. These estimators attempt to uncover

8930-419: The value of the underlying asset, with, additionally, a correction for instantaneous underlying changes. See volatility (finance) , volatility risk , Greeks (finance) § Vega . A true beta (which defines the true expected relationship between the rate of return on assets and the market) differs from a realized beta that is based on historical rates of returns and represents just one specific history out of

9025-406: The way in which they are financed and partly by the relative size of the companies. Various methods of financing an M&A deal exist: Payment by cash. Such transactions are usually termed acquisitions rather than mergers because the shareholders of the target company are removed from the picture and the target comes under the (indirect) control of the bidder's shareholders. Payment in the form of

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