What is the spread?

When a company agrees to be bought for cash, its shares usually trade a little below the price offered.

Say Woodgrove agrees to pay $50.00 a share for Litware, and Litware trades at $48.00. The gap is $2.00 a share.

The spread is that gap as a share of the price: 2.00 ÷ 48.00 = 4.2%. It's the gain if the deal closes at the [offer](#offer).

It's also called the merger spread, the deal spread or the arbitrage spread.

In a stock deal with a fixed exchange ratio, the spread moves with the buyer's share price. This page covers cash deals.

The offer is paid only if the deal closes, and only after it does. Someone who buys the shares today has to wait for the cash.

The spread is the pay for that wait, and for the chance of a [deal break](#deal-break).

Trading costs and the cash tied up in the meantime count too.

The usual sum divides the gap by the share price: (offer − price) ÷ price.

This is the gross spread. It leaves out dividends, costs, taxes and the time to closing.

The same gap can be stated three ways:

In dollars

Offer $50.00, price $48.00: the gap is $2.00 a share.

As a spread

2.00 ÷ 48.00 = 4.2% of the price, the gain if the deal closes at the offer.

As a yearly rate

With 120 days to go, 4.2% is 12.7% a year. That's the annualized spread.

Some writers divide by the offer instead: 2.00 ÷ 50.00 = 4.0%. That gives a slightly smaller number.

The spread changes every day the shares trade. Common reasons:

Time

As closing nears, the wait gets shorter. The spread usually narrows toward zero.

News on the deal

A second request, a lawsuit or a close vote can widen it. An approval can narrow it.

Interest rates

Cash tied up in the shares could earn interest elsewhere. So for the same wait, higher short-term rates usually mean a wider spread.

A higher bid

When the market expects a rival bid or a raise, the shares can trade at or above the offer. The spread is then zero or negative.

The market

When the stock market falls sharply, spreads on many deals can widen at once.

Spreads vary a lot from deal to deal.

By year of announcement, the median spread the day after announcement ran from 4.10% to 7.94% before 2001. From 2001, it ran from 1.74% to 2.63%. These are spreads, not yearly rates.

These figures cover 2,182 US deals for publicly traded targets that closed or failed from 1990 to 2007. The count includes deals paid in cash, stock or both, and leaves out deals with more than one bid.

In those deals, the median spread narrowed steadily on deals that went on to close. Deals that later failed had wider median spreads soon after announcement. Their median spread rose sharply a few days before the failure was announced.

If the deal closes at the offer, a holder who bought at the share price gains the spread. Costs and taxes come off that.

If the deal fails, the shares usually fall. The fall is often much bigger than the spread.

A holder who sells before closing gets the market price, usually below the offer. A holder who keeps the shares is paid the offer after closing.

Why there is one: someone who buys now waits months for the cash and carries the chance that the deal fails. The spread is what the market pays for both, the wait and the chance of a break. It usually narrows as the close nears.

The Gross spread column and the deal page show it. It counts the cash offer only: a CVR and dividends are left out. Dividends count in the annualized spread.

A negative spread means the shares closed above the offer, which can happen when the market expects a higher bid.