Mergers and Acquisition Case – 2025
OVERVIEW
The Mergers and Acquisitions case places participants in the role of hedge fund financial investors. A company is up for sale, and several public companies will submit tender offers to acquire it. Participants must swiftly assess which bids are likely to turn into binding offers, while also monitoring the possibility of a friendly takeover approved by the board of directors and key shareholders.
Mergers often result in significant stock price volatility for both the acquiring and target companies. Participants may hold a non-majority stake in the company being acquired, with the goal of increasing the value of their shares and selling them at a higher price. Additionally, they will encounter asset mispricing, influenced by the dynamic nature of mergers and acquisitions.
KEY OBJECTIVES
- Monitor the price movements of companies resulting from both short-term and long-term reactions of investors and the overall market. Generate profits by capitalizing on asset mispricing that occurs during the mergers and acquisitions process.
- Observe closely the daily shareholder voting polls, track the cumulative percentage of shareholders who have accepted the deal, and carefully assess the probability of the acquisition to predict stock prices accurately.
- Leverage private information and monitor investor behavior to identify companies whose tender offers are rejected, enabling you to capitalize on asset mispricing driven by asymmetric information.
- Develop trading strategies to effectively capitalize on merger arbitrage opportunities. Analyze post-voting results to speculate on the likelihood of deal completion, which directly influences stock prices. Investor reactions to mispricing will drive up trading volumes and stock volatility.
DESCRIPTION
Each heat will last for 10 minutes, simulating one week of calendar time. In each heat, there will be six securities with distinct volatility and liquidity characteristics, allowing participants to experience and adapt to different market conditions and trading environments.
- Trading time per heat: 600 seconds (10 minutes)
- Calendar time per heat: 1 week (5 consecutive business days)
Each trading day is represented by a 120-second segment. Monday is covered in the first 120 seconds, Tuesday in the following 120 seconds, and so on. Specifically, Monday is from 0 to 120 seconds, Tuesday from 121 to 240 seconds, Wednesday from 241 to 360 seconds, Thursday from 361 to 480 seconds, and the remaining time from 481 seconds onward represents Friday.
- Data retrieval via RIT API and RTD Links will be enabled.
- Order submission using the RIT API will be disabled.
MARKET DYNAMICS
Each heat presents unique voting results, acquisition outcomes, market dynamics, and parameters. Potential parameter changes may include factors like the proportion of shareholders supporting the deal, stock liquidity, and volatility. However, certain market dynamics and parameter details will remain constant across all heats to assist participants in crafting their trading strategies. For reference, details of an example heat involving six stocks—SHO, JB, ORN, BC, CG, and RIT—are provided below.
| Securities | SHO | JB | ORN | BCH | CG | RIT |
| Last Closing Price | $56.00 | $62.00 | $75.00 | $93.00 | $124.00 | $35.00 |
| Commission/Share | $0.02 | $0.02 | $0.02 | $0.02 | $0.02 | $0.02 |
| Maximum Order Size | 10000 | 10000 | 10000 | 10000 | 10000 | 20000 |
| Liquidity | Medium | Medium | Medium | Medium | Medium | High |
| Volatility | High | Medium | Medium | High | High | Low |
The case involves six companies: SHO, JB, ORN, BCH, CG, and RIT. RIT, a large-cap company, is considering selling, with shareholders weighing offers from potential buyers. SHO, JB, ORN, BCH, and CG are all interested in acquiring RIT, as the acquisition is expected to drive growth and reduce competition in the market. Each of these companies has submitted tender offers to acquire all outstanding RIT shares. The acquiring companies have different motivations and potential synergies, resulting in varying valuations of RIT, but all have an equal chance of submitting a bid. For the deal to go through, at least 50% of RIT’s shareholders must agree to tender their shares by the end of the trading week, and the winning tender offer must align closely with RIT’s market value.
Participants will assume the role of hedge fund managers and work to accurately assess the fair value of the stocks involved. The closing prices of the shares, as of last Friday, are listed in the table. Participants must also determine which single bid is likely to pass due diligence and the approval process, ultimately resulting in a successful takeover. While private analysts will serve as their main source of information, participants should also pay attention to market signals, as stock movements will indicate the actions of other hedge funds and potentially reveal the insights they’ve gathered.
Each day, RIT shareholders will vote on whether they agree to be acquired, while also deciding which tender offers from the five bidding companies have failed to materialize into binding deals. Financial analysts play a crucial role in helping participants identify when a company drops out of the bidding process by providing insights based on news and their contacts at various firms. However, these analysts cannot always be fully trusted, as some may be misled by incorrect information or lack the necessary expertise.
Analysts will privately send participants information that eliminates one potential bidder, but participants must be cautious in relying solely on this data. Since the quality and accuracy of the analysts’ reports may vary, participants will need to supplement this information by closely observing the stock market and other traders. Stock price movements and the behavior of other traders can provide key signals regarding which company is actually falling out of the bidding race. Ultimately, participants must base their decisions on the collective information in the market, which is influenced by the majority opinion of the analysts. By paying attention to both the advice of their private analyst and the actions of other traders, participants can deduce which company is no longer in the running each day. Success in this process depends on a combination of careful analysis, collaboration, and strategic interpretation of market signals.
The stock prices in this scenario follow a random-walk process, where returns are drawn from a normal distribution with a mean close to zero. This implies that at any point in the simulation, the stock price is just as likely to increase as it is to decrease. Since all the acquiring companies are significantly large, the acquisition process is not expected to have a major impact on their share prices.
However, analysts believe RIT shareholders will only accept an offer if it includes 55% of the acquiring company’s share value plus $3 in cash per share. Therefore, during the acquisition process, analysts estimate RIT’s fair value using a function that considers the likelihood of a takeover, its current share price, and the expected share prices of the active bidders at time t.
P_RIT,t+1 = P_RIT,t ∗ (1 − θ) + (0.55*E[P_X],t + $3) ∗ θ
P_RIT,t represents the price of RIT shares at time t, while E[P_X],t denotes the expected price of the shares of companies with active tender offers at time t. The variable θ represents the probability of acquisition. Given the uncertainty around which company will acquire RIT before the acquisition is finalized, analysts suggest using E[P_X],t as the expected share price of the companies with active tender offers at time t.
In other words, if the acquisition succeeds, each share of RIT will be valued at 0.55 times the value of a share of the acquiring company plus $3 in cash. Given the uncertainty about which company will complete the acquisition, analysts recommend using the expected price of shares from all potential bidders as a proxy for the acquiring company’s value. If the acquisition fails, the stock price of RIT falls back to its pre-acquisition price of $35.00.
To accurately value RIT’s stock, it is crucial to evaluate the likelihood of the acquisition being completed and to consider information from private analysts. Each day, 20% of the shareholder base will vote to accept or reject the deal, with the results being made public. If, by the end of the week, more than 50% of shareholders have voted in favor of the acquisition, the deal will be deemed successful if the tender offer closely matches the value of RIT.
Participants may notice an immediate spike in RIT’s stock price both before and after the voting outcome, potentially surpassing the current market price. This is often attributed to investors’ short-term overreactions. RIT’s stock price is expected to stabilize close to the offered price once the deal is finalized. Similarly, the stock prices of the companies making offers to acquire RIT may experience temporary fluctuations due to investor reactions, but these prices are likely to recover before the acquisition is completed.
Participants are responsible for using information from the company’s news releases to accurately evaluate the value of RIT. To achieve trading profits, they should create a model to determine the fair price of RIT shares based on this information. They should then execute trades that align with their analysis of whether the market is overestimating or underestimating the likelihood of the acquisition taking place.
TRADING LIMITS AND TRANSACTION COSTS
Each participant must comply with both gross and net trading limits as specified in the case description, which will be updated before each heat. The gross trading limit is set at 250,000 shares, and the net trading limit is set at 200,000 shares. The gross trading limit represents the total of the absolute values of all long and short positions across all stocks. In contrast, the net trading limit reflects the difference between long and short positions, with short positions offsetting long positions. These limits will be strictly enforced to ensure that participants do not exceed them.
The maximum order size and commission rates specified in the case description will remain the same for each heat. A transaction fee of 2 cents per share applies. The maximum order size is 10,000 shares for all the potential acquiring companies and 20,000 shares for RIT.
POSITION CLOSE-OUT
At the end of each heat, any open positions will be closed based on the last traded price observed in the market. Regardless of whether the acquisition occurs, computerized market makers will enhance market liquidity toward the end of trading to prevent manipulation of the closing price.
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