16. Event-Driven Strategy

Published at 1652114945.51


Event-driven strategy is a strategy to find profits from misestimating company prices at major events such as mergers and acquisitions, bankruptcy, share buyback, capital restructuring, extraordinary dividend payments. Investors will study their circumstances and assess how they will impact the company’s stock price. They identify potential opportunities that may arise and take advantage of them.

The strategy's effectiveness depends greatly on the investor’s ability to capture information, analyze, and evaluate.

More recently, the event-driven strategy has also included pricing after major global macro changes or natural disasters in different regions.

Example of Event-Driven Strategies in Merger and Acquisitions

Arbitrage trading involving mergers and acquisitions (M&A) activities is one of the popular examples of an event-driven strategy.

Hypothetical scenario: merger and acquisitions with cash payments. Buyers propose buying shares of a target company at a fair price (bid price) and the price is higher than the market price.

Trading strategy: if you believe that the deal will go as announced, you will buy the shares of the target company and sell when the deal closes.


Example of Event-Driven Strategies in a Global Macro Event

As the Russia and Ukraine war continues to drag on, investors who have information that Russia and Ukraine are major wheat exporters in the world will see a short-term decline in supply. It creates an upward demand for wheat and rice producers. Investors can take advantage of this opportunity to make a profit.

The positive stock movement of Vietnam Seed Group (HOSE: NSC) in the market downtrend may have partially reflected this event.


Event-Driven Strategic Risk

Incorrect pricing of the event impact is the most common cause of losses for investors using this strategy. In addition, a less common but potentially huge cause of losses is third-party interference. In an event-driven strategy, third parties can be very powerful organizations such as the U.S. or Chinese governments. Actions that can change an investor’s entire calculation include policy changes, releases of strategic reserves, embargoes, etc.

In addition, there are unexpected internal events. For example, M&A events cannot take place due to a few reasons: shareholders of the target company do not approve, and the security and exchange commission does not approve and does not grant licenses. Another example is that the deal got approved, yet needed time for the completion of legal procedures. When the shares got converted and allowed to trade, the price fell again and investors no longer made profits.