Nelly’s Guide to Merger Arbitrage, Odd Lots, and Other Special Situations

Back in 2024 there was a trade that rippled through Fintwit, gaining momentum as it went.

That trade was the merger arbitrage between Jet Blue and Spirit Airlines. Spirit recently entered bankruptcy protection, but back then it was thriving existing. Jet Blue was interested, and made an offer to buy.

After months of debate and analysis, the unthinkable happened. A U.S. federal judge blocked the transaction, agreeing with the Department of Justice’s worry that the two airlines combined would control too much of the market.

The interesting thing this deal was the sheer mass of retail investors who decided to get in on the trade. The whole thing was led by some prominent names who had played the Elon Musk takeover of Twitter successfully (remember when Musk tried to get out of buying Twitter? Hard to imagine such a world), who saw a similar situation playing out with Jet Blue and Spirit.

These folks were betting hard that the deal would happen, convinced they had done the analysis. I saw a few who said they lost “six figures” on this attempted arbitrage, but I’ve learned from now to take what folks say on Twitter with a huge grain of salt. Saying that, I do think it’s likely a few of the larger accounts lost that much.

Despite having a newsletter called Canadian Dividend Investing, I’ve been an on-again off-again arbitrage player for more than 10 years. For years I would keep a small portion of my RRSP and TFSA in cash while I waited for these situations, and on average I’ve done about 3-5 deals a year. I’ve had a few swings and misses, but overall it has been a successful strategy for me. I’ve generated returns much higher than GICs.

I used to be much more active, but now I’m mostly a buy and hold investor. I’ll do the odd one, especially if I have some unexpected cash. I’m participating in one today for the first time in over a year. But overall that’s an exception, not the norm.

(Keep reading to see more details on my current arbitrage play)

When the Jet Blue/Spirit deal was officially squashed, I shared my three arbitrage rules on the ol’ Tweeter app. The post did well.

The tweet was polarizing, to say the least. A bunch of people liked it, followed me, etc., but others felt like I was grave dancing by waiting for the deal to go through before I posted. Which, honestly, is fair. I’ve been in that spot before, and I know it sucks when someone shows up with an I told you so.

I also got a ton of questions about arbitrage, so I thought I’d put down my thoughts on the subject. I wrote up this giant guide to how I play those situations, and it was great. People loved it. And then it got deleted as I moved newsletter providers. I thought it was lost forever.

I had forgotten about it, but then fate intervened. While searching for another file on my computer, I came across the backup I had made oh so many years ago. I went through it, changed some things around (including this new intro) and decided to publish it again.

Hopefully y’all enjoy it as much as you did the first time.

Let’s start first with some definitions.

(Feel free to skip this section if you’re already well familiar with the lingo and how these situations arise)

Let’s start at the beginning. What exactly is arbitrage, anyway?

The classical definition of arbitrage is the simultaneous purchase and sale of the same asset in different markets in order to profit from a difference in its price.

A simple example would if gold traded at $1,000 per ounce in London and $1,010 in Paris, once you factored in exchange rates. An arbitrageur would buy the gold in London, immediately sell it in Paris, and pocket his $10 profit. Since this is a risk-free profit, a rational investor would continue to do this trade until the inefficiency closed, even going as far as borrowing money to leverage the situation.

These kinds of things happened much more commonly in the 18th, 19th, and 20th centuries, times when information was not so readily available. There are some famous stories about the Rothschilds realizing speed of information was huge and employing a horse relay system so they could get information a few hours before everyone else, a massive advantage that seems really quaint today.

These days information is available to everyone all at the same time, and there’s no advantage left over for anyone. So the definition of arbitrage has changed.

These days, most arbitrage is in the form of risk arbitrage, where an investor analyzes the risk in a special situation in the market and determines whether the implied risk is above or below the actual risk. Don’t worry right now if that sounds complicated, we’ll get to some examples in a minute.

These risk arbitrage special situations are essentially divided into three groups:

Note: your author has never been able to find a convertible arbitrage situation that tickles his fancy, so he stopped trying years ago. This piece will focus on the first two types of arbitrage. You also need a certain amount of knowledge on convertible debentures to take advantage, which I don’t really have and likely won’t acquire.

Don’t worry if you don’t understand the standard issuer bid process quite yet. I’ll explain more about that later.

Next, let’s talk about how to find these special situations.

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So you’ve read all about arbitrage (or you already knew what it was), and you’re still eager to make some profits. Okay, great. So let’s begin by talking about how to find these situations.

I’ve found all of these to be effective over the years, although they do come with downfalls.

Let’s talk about the laziest way first. You just live your life just like normal and stumble upon these special situations. You read about it on Twitter, or see a headline on BNN or CNBC, or find out about it in some other way. This has the advantage of being really easy — ridiculously easy — but has one massive disadvantage. You’ll limit yourself to the biggest and most public deals this way, a strategy that I think is pretty much the opposite of what you want to be targeting.

The next laziest way is to simply pay someone to track all the mergers, acquisitions, take private deals, odd lot tenders, and so on. There are a few of these services out there, most with very reasonable fees and pretty smart people analyzing the deals for you. It’s a nice way to get up to speed quickly.

But the analysis has downfalls, since many people will take the lazy way out and simply copy what the author suggests. That leads to crowded situations, and those can turn out very badly. We’ll go over a couple of those situations later.

Finally, I’ll share my preferred way to find these special situations — Google Alerts.

Do people even use Google Alerts anymore?

Surprisingly, yes. And it’s not just for narcissists who desperately want to see their name in the 21st century version of the local newspaper, either.

My strategy here is very simple. I set up Google Alerts for all the important keywords and have them set up to hit my inbox each day. Phrases I use include:

The secret to using Google Alerts is you have to be a little more specific. You can’t use something like “merger” or “arbitrage” because they’re too generic and you’ll be wading through mountains of useless junk. But you can also be too specific.

Ultimately, what you want is to be made aware of a steady flow of these special situations, covering everything from the big deals that make all the headlines to the smaller deals that only get published in trade journals, local news, or more obscure sources. In this game the more rocks you can turn over, the better.

Canadian investors can also use SEDAR+, the much maligned electronic filing system for Canadian securities reporting. The old version of SEDAR was very easy — you could pop in once a month or so, do a search for the document type you wanted, and Bob’s your uncle. The new SEDAR is weird and unusual, but I think I’ve figured it out.

If you want to search for SIBs, choose Formal Issuer Bid under filing type and then Issuer Bid Circular in the document type. Just like in the screenshot below. Make sure you fill out the date range you’d like.

The process is similar for take-overs. You put Take-over Bid in the filing type and Take-over Bid Circular in the document type.

A couple quick notes about SEDAR:

I effectively view odd-lot tenders and merger arbitrage as completely different things, even if they’re both in the arbitrage category.

I’m starting with odd-lot tenders because my view is they are the most fertile hunting ground for retail investors. Big investors will often play in merger/takeover arbitrage situations, but they won’t bother with odd-lot tenders. That’s a plus; we want that. I’d say 80% of my efforts in the arbitrage space in general go towards odd lots.

Odd-lot tenders are also much simpler than merger arbitrage, and they’re the closest thing we have these days to traditional arbitrage.

Here’s the concept explained visually. A little more detailed explanation is below.

An odd-lot tender is a situation where a company is repurchasing a big block of their shares. To make it fair, the company will announce to all shareholders what it plans to do and what price it will pay, so all shareholders can participate. But it gives shareholders who hold less than 100 shares (odd-lot holders) special priority.

The announced price will either be a set price or a range. The range is referred to as a Dutch auction. In such a scenario the company will try and buy for the lowest price possible, and then move up to the next price, and so on. The bidding stops once the allotted amount has been exhausted or the bid runs out of shares. The range helps the company get the deal done sometimes, since it gives it some wiggle room.

Let’s look at a fictional example: Nelly Co has 10M shares outstanding at $20 per share. The company announces it’s going to repurchase 2M shares at $22, with an odd-lot exception.

Nelly Co shareholders mostly decide to bail (jerks) and 6M shares are tendered to the offer. Since the company only offered to repurchase 2M shares, each shareholder gets pro-rated, meaning, at least in this scenario, they only get 33% of their offered shares purchased.

So if investor A, Lenny, owned 10,000 shares and tried to sell all of them, he’d have 6,667 shares left.

The odd-lot provision, meanwhile, means that anyone who tenders fewer than 100 shares is not subject to proration. They get all of their shares purchased no matter what happens with the rest of the deal. This then further pro-rates things for the rest of shareholders, who end up with somewhere under 33% of their shares tendered. Basically, retail investors with fewer than 100 shares get special treatment because companies don’t want to screw over the little guy.

So the arbitrage situation here is pretty simple. You wait for the announcement, buy up 99 shares, and tender those bad boys. Easy. Peasy. Lemon squeasy.

Don’t just rush into a situation, either. Often, when a company announces a SIB, shares will rocket very close to the offered price as arbitrageurs bid up the stock to get their piece of the pie. If you patiently wait and buy a little while later, you’ll often get a better price. I’m willing to buy up to a week before the offer expires. Any closer to that and I start to worry I won’t be able to do the tender process in time.

In theory, you should be able to buy two days before and tender your shares the day before and you should be fine. Remember, trades settle in one business day in Canada, versus two days before. But I like to give myself a little more time, as a just in case scenario.

On the surface, odd-lot tenders look like a free lunch, something we all know is impossible in the finance world. You buy 99 shares of something and sell it in 4-8 weeks back to a buyer who has said they’re going to buy your shares and has the cash put aside to do so. As long as you buy in for below the offer price, the profits are guaranteed.

There’s really only two things that can go wrong. They are:

The second thing is what you have to look out for. Companies have been known to change the rules as the process rolls along, usually in a situation where too many arbitrageurs start getting involved. Remember, a SIB is not a contract. It is an offer to buy, and there is a certain amount of flexibility there.

An example? Okay. In 2018, Blue Bird Corporation (NASDAQ:BLBD), a leading school bus maker, offered to buy approximately 7% of its outstanding shares for $28. The stock traded around $25. Arbitragers crowded in, buying 99 shares to take advantage of the odd lot exception, which hit a bit of a frenzy when Seeking Alpha published two pieces on the trade within a couple days of each other.

It didn’t help when one author called it a “free lunch”, either.

Suddenly, a couple weeks before the deal was scheduled to close, Blue Bird announced it was dropping the odd lot preference, meaning investors with fewer than 100 shares were in the same boat as everyone else. They no longer got preferential treatment. The stock fell 25%+ in the next month as the arbitrageurs rushed for the exits. The company, meanwhile, was happy — after all, they got their allotted shares at the amount they were willing to pay, all while screwing the arbitrageurs.

Your author remembers this well because he participated and lost money. I did better than most, although I was in it a few months longer than I wanted to be. I walked away with a loss of about 8%.

Blue Bird was the first deal I lost out on. The second was Frontera Energy (TSX:FEC) in 2024. The SIB was for $12 per share with an odd-lot provision. I bought in around $8.25 and watched shares fall lower as the company removed the provision. I lost about $0.25 per share on the deal, multiplied by 99 shares. So it was pretty minimal, even if I did do it in a few different accounts.

The other big issue with odd-lot tenders is they don’t scale.

If you buy 99 shares of a company worth $50 that’s offered to buyback shares at $55, you’ve got a maximum profit of $495. In a good year you might do 12-15 of these deals; in a bad year it could be as few as 3-5. And take it from a guy with experience in this part of the arbitrage world — $500 is a decent profit. I’ve done ones as small as a $200 profit and don’t generally touch anything smaller than that.

Now there is a way to scale this strategy, at least a little bit. You can odd-lot tender the same deal in different brokerage accounts and nobody is the wiser. For instance, you can:

You get the idea.

There are even people who maintain, say, an RRSP account in one brokerage and a TFSA account in another brokerage and will do the odd-lot tender in both accounts. That is, as far as I know, against the rules, since each individual shareholder is limited to the 99 share odd-lot provision. However, I also know people who have gotten away with it.

My rule of thumb is to not abuse these situations, since I know companies can go in and cancel the odd lot provision whenever they’d like. If too many people go to town in these situations, it ruins it for the rest of us.

I’ve been known to share these ideas in the newsletter, but I don’t any longer. That’s Nelly’s beer money, dargbloomit.

Okay, you’ve got your 99 shares and you’d like to sell them back to the company. How do you do that?

What you need to do is to instruct your broker that you’d like to participate in the tender offer.

This used to be a transaction where you had to phone in, but most brokerages have made the process much easier. Some will make you fill out a form or send a secure message in their system, while others will recognize a stock has a corporate action and give you the option to act.

Phoning in was a pain. Sometimes you’d get an employee who had no idea about the situation. You’d explain and they’d have to go online to find the proper info. I had one situation where I had to phone back in three times to get it done. For whatever reason, their internal system had no record of it.

A lot of brokerages do this for free, which is a nice touch. Since it’s mostly automated now, it makes sense. There is at least one notable exception. I know for sure that Wealthsimple charges $50, which really eats into your profit.

If you’re unsure of how to tender shares with your brokerage, there are two ways to find out:

Typically you’ll have 6-8 weeks from when the company announces the SIB to when it actually buys back the shares. What I do is wait until we’re getting close to the day the transaction actually takes place, say 5-10 business days before. This allows the brokerage time to iron out the kinks on their back end, and you’ll have better visibility into what the deal will look like, especially useful in a situation where the company has told you a range they’re willing to pay.

You also have the option to sell your shares in the market. Say you bought something for $50, intending to sell it for $55. For whatever reason, the stock hits $57. You’re free to sell your shares at that point, even if you’ve instructed your broker to tender. It just has to be before the expiry day. So if a tender offer is for December 31st, you can sell your shares on December 30th.

Once the company has repurchased your shares, they’ll remain in your account for at least a few business days while your broker sorts everything out and the money moves around. Do not try to sell your shares in the open market in this scenario, although I don’t think your broker would let you do so anyway.

Merger arbitrage is a lot more complex than odd-lot arbitrage, so I didn’t used to spend as much time there. But merger arbitrage can be a fertile hunting ground, provided you follow my ground rules.

Merger arbitrage will take on one of the following forms:

There are more combinations, but those are the main ones

In a given year there are anywhere from a couple dozen to 100+ acquisitions in North America, with even more around the world if you’re willing to play there. The hunting ground is fertile, and investors who venture into this part of the market need to be patient.

At its core, most people think merger arbitrage is about odds. You’re looking for situations where the odds of a deal happening are greater than the implied odds. Or so the logic goes, anyway.

For example: Nelly Co decides to acquire CDI Inc for $10 per share. CDI shares go from $5 to $9.50, suggesting that there’s a 10% chance Nelly will renege on the deal ($0.50 upside, $5 downside). You read all the offering documents, do research into Nelly Co, and conclude there’s a 95% chance the deal closes. The real odds exceed the implied odds, so it’s a good arbitrage situation.

But I don’t think you should look at merger arbitrage like that — for a couple reasons.

Firstly, let’s go back to what arbitrage is and what it isn’t. Remember, arbitrage is taking advantage of a market inefficiency to score a riskless profit. It is not about speculating on the chances of a deal going through.

When merger/takeover arbitrage becomes an odds-based exercise too many variables come into play. We’re forced to become handicappers, and exercise most of us are terrible at.

Look again at the example above. Your conclusion is the deal has a 95% chance of going through. The market’s assumption is it has a 90% chance of going through. What makes your odds more accurate than the market’s?

The answer, at least most of the time, is delusion. The average investor does not have the ability to outfox the market here. This is doubly true when a lot of people are looking at the same deal.

You’ll often see the same thing happen. An investor will play a couple of merger arbitrages with huge spreads and be successful at it. So it emboldens him, and he starts assigning higher and higher odds of subsequent deals going through. Soon he’s assigning a 95% probability on a deal that’s 50/50 at best, and eventually reality catches up to him.

The way to be successful at merger arbitrage is to stop thinking about it as an odds based exercise. That thought process will lead one down a path where they’re essentially gambling, convinced they have some sort of edge in an area where they don’t. This is exactly what went wrong with the Jet Blue/Spirit deal, and what will go wrong again and again in the future.

Instead, remember what arbitraging is at its heart: a risk free transaction where you’re simultaneously buying and selling and taking a small, risk-free profit for doing so.

Now that I’ve explained the process in full, let’s go back to the rules I first outlined so many words ago. To remind everyone, they are:

Many people in the replies of my original tweet thought a potential merger arbitrage was a no-go if it broke all of the rules. Let me clarify right now — a merger or acquisitions is a no-go if it violates just one of the rules.

(Odd-lots are a little different, since the potential loss is limited. They’re just too small to be anything more than a tiny diversion. So you can get a tiny bit more frisky there, but the rules continue to be your friend)

What the rules do is create discipline. They force me to participate in very specific deals in only isolated corners of the market.

You do not want to be participating in every prospective deal under the sun. You also don’t want to act like a arbitrage fund manager and spread your risks. To have success in this space you must be incredibly selective. You’re looking for one type of deal and one type only.

Here’s what I’m looking for:

They say arbitrage is picking up nickels in front of a steamroller; if you’re selective enough you can minimize the risk to picking up quarters in front of a golf cart. It still sucks when some drunk runs over your foot, but at least you’re not a road pancake.

I also think arbitrage is best when you do it as a sideline. Think of it as beer money, or a distraction to your normal investing. This mindset makes it a lot easier to stay away when there are only mediocre deals.

Simplicity is the key here, and every condition the buyer must meet increases the chances of a deal going sideways. Even a few conditions — especially when the government gets involved — can turn a merger arbitrage into merger gambling. It’s basically a parlay, and gambling houses love offering parlays, since they increase the chances of loss. Thus, I’m looking for easy deals in forgotten corners of the market which are too small for many professionals to participate.

When you look at an arbitrage situation strictly by the odds, it becomes gambling very quickly — even if you have an edge (spoiler alert: you don’t). Arbitrage is the risk-free leveraging of one market against another. No acquisition is risk free, but you can minimize your risks by sticking to situations that are as close to risk free as possible.

But Nelly! That’ll decrease the number of deals I can participate in.

Yup. In fact, that’s the whole point.

Way back at the beginning I teased an arbitrage deal I’m currently doing. I’m going to share it with you guys.

Back in May 2025, Interrent REIT (TSX:IIP.un) agreed to be acquired by Carriage Hills Properties Acquisition Corp, a joint venture between CLV Group — an Ottawa-based landlord — and GIC, which is part of Singapore’s sovereign wealth fund. It was a cash offer for $13.55 per unit.

There was a go-shop period, where Interrent could try and solicit higher bids. Then shareholders would need to approve the deal. The government would need to get involved and approve the deal. And then existing lenders and CMHC would need to approve the new owners.

Most of these are standard acquisition clauses, and investors assumed the deal was pretty much a slam dunk. The stock traded for between $13.30 and $13.40 a couple months after the deal was announced. The deal was expected to close by the end of 2025.

We’re now into June 2026, and the deal still hasn’t closed. When Interrent came out with Q1 results in May, the company stated the deal would be delayed yet again. But we did get two important details:

Interrent also reported much lower FFO than the same quarter last year. The reason? It spent most of its earnings on deal-related costs. I view that as a massive positive.

As I type this, Interrent shares trade for $12.96 each. That gives us a 4.55% return in just over a month. Call it about 50% annualized.

There’s one risk here. The deal gets delayed yet again, and the buyers throw up their hands and walk away. Another delay would be very on brand for this deal.

Let’s run it through the rules.

It’s a simple deal from a friendly buyer. It’s an all-cash deal. And the buyers have put up with a bunch of delays already. I doubt they’re going anywhere.

The key to a deal like this is to keep the weighting reasonable. This is only a small part of my portfolio because I recognize there are risks there. I think the deal is a slam dunk and it’ll close when intended, but if it doesn’t work my downside is limited.

Professional arbitrageurs will go all-in and borrow on top of that. Charlie Munger did that once, and it worked out quite well. But I would never, and suggest y’all don’t consider it either.

Arbitrage can be a lot of fun, and it’s a neat diversion from the rest of your portfolio. I don’t do it much anymore, but will partake every now and again.

My view is it’s best if treated like a small side hustle, something you do for beer money every now and again. Get in, make a few hundred bucks, and get out. Don’t get greedy.

When done right, it generates nice returns on small amounts of capital. Sure, it doesn’t scale, but a lot of other things we do to save money doesn’t scale, either. Loading up on sales at the grocery store is only going to save a couple hundred bucks at the most, but it all adds up.

Now that I’ve put this out there, I doubt I’ll share any arbitrage situations any longer. Y’all have the tools, now you can put in the work. I’ll continue my lazy method — I abandoned the Google Alert system years ago — quietly on my own, my own personal quest for beer and golf money.