I was sent this TikTok of someone saying that you can buy Aphria ($APHA) ahead of their planned merger with Tilray ($TLRY) and make “free money”.
- $APHA shareholders will receive 0.8381 shares of $TLRY upon closing.
- Given $APHA trades at $17.70 per share and $TLRY trades at $34.14 per share, the thought is that $APHA should be worth $28.61 per share, an easy 62% profit.
This is a newbie retail trader theory that is attempting to recreate a long-time strategy called “merger arbitrage”.
They are missing the other half of the trade.
- $TLRY can decline in value (as it crashed yesterday) and the value of 0.8381 of a $TLRY share will go down with it. If you had just bought $APHA a couple days ago, you’d have definitely lost money.
- To account for this, traditional merger arbitrage traders would buy a share of $APHA and short 0.8381 shares of $TLRY, so they profit on the gap narrowing and are protected against the actual movements of the stocks.
They also are ignoring the risks, even if you employ the merger arbitrage strategy correctly.
- The gap between the stocks can widen because of volatility while you wait for the deal to close, which will show paper losses.
- Merger deals have a real chance of not closing or getting broken up, and if that happens, you might lose a good deal of money.
- Shorting costs on $TLRY are undoubtedly high, so you’ll be “spending” money on borrowing costs while you wait.
Takeaway: There’s really no such thing as “free money” in this world.
- If this stuff was really so easy, everyone would do it and there wouldn’t be a need for highly-technical and highly-paid professionals to analyze investments and trades.