5 Merger Funds With Steady Returns

If you want to dabble in merger arbitrage, leave it to the experts who run these funds.

Xerox announced in September that it plans to buy Affiliated Computer Services, promising to pay $18.60 in cash plus 4.935 of its own shares for each share of the Dallas-based technology consultant. At Xerox’s October 15 closing price, the offer is worth about $56.55 per share. Yet ACS shares closed that day at less than $52.68. Is this a nearly $4-a-share free lunch just waiting to be served?

Sure looks that way on the surface. Say you buy at current prices and the deal closes at the end of January 2010 (Xerox proposes an early 2010 completion). You will have made 7.3% on your money in less than four months. On an annualized basis, that’s a 25% return. But while nothing is stopping amateur investors from getting in on a deal like this (see Call Me Manny the Arb), there are a lot of potential pitfalls. That’s why it’s a good idea to leave merger investing in the hands of specialists known as risk arbitrageurs. They sort through hundreds of deals like this one, investing in some and avoiding others.

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Contributing Editor, Kiplinger's Personal Finance