Activist arbitrage in M&A acquirers

A relatively understudied activist investor strategy is to purchase shares in the acquirer after an M&A announcement and exercise shareholder rights to change deal terms, or even to block the deal, through public campaigns. We provide new evidence on how the strategy affects target firms and activists' returns. Activists tend to target deals involving defense mechanisms, and smaller acquirers with a history of low returns on invested capital. By blocking some deals and pushing other acquirers to lower their bids, such an "activist arbitrage" strategy yields significant returns and serves as a governance antidote to value-destroying acquisitions.