A merger arbitrage spread is the gap between the takeover price and the target's market price: for a cash deal, spread = offer price minus market price, percent spread = spread divided by market price, and annualized return is roughly percent spread times (365 divided by days to the expected close). Example: Pacira BioSciences ($PCRX) closed at $36.34 on October 16, 2026, against Viatris' $36.50 cash offer. That is a $0.16, or 0.44%, gross spread. The gap is the market's price for two things: the risk the deal fails, and the time it takes to close.
A wide spread says the market sees real doubt or a long wait. A tight one says the crowd thinks the deal is close to done. Either way, it is a clue, not a verdict.
The basic math for a cash deal
Three numbers do most of the work.
- Gross spread ($) = offer price minus the target's market price.
- Percent spread = gross spread divided by the target's market price. That is the return if the deal closes at the stated price.
- Annualized return is approximately percent spread times (365 divided by days until the expected close). This simple version ignores compounding.
"Gross" is doing real work in that list. It ignores commissions, financing or margin costs, any dividends paid along the way, and taxes. The net number is always smaller.
The annualized figure is the one traders compare across deals, because a 2% spread that pays in two months is a very different trade from a 2% spread that takes a year.
Two live examples at the October 16, 2026 close
Viatris and Pacira. Announced October 8, 2026, the deal is a tender offer at $36.50 per share in cash, for an equity value of about $1.65 billion. Shares not tendered are to be bought in a second-step merger at the same price. Closing needs a majority of Pacira shares tendered and the expiration of the applicable regulatory waiting period, and the companies said the deal is "expected to close by the end of 2026" (joint press release, SEC filing). Our earlier read on the deal: Viatris' $36.50 Pacira deal puts fixed-cash takeovers back in the spotlight.
Proofpoint and Varonis. Announced October 15, 2026, Proofpoint agreed to buy Varonis ($VRNS) for $49.75 per share in cash, about $6.3 billion in total. It needs Varonis shareholder approval and regulatory approvals and is expected to close in the first half of 2027 (Varonis press release, SEC filing).
| Target | Cash offer | Oct 16, 2026 close | Gross spread | % spread | Company close guidance |
|---|---|---|---|---|---|
| $PCRX | $36.50 | $36.34 | $0.16 | 0.44% | By end of 2026 |
| $VRNS | $49.75 | $48.72 | $1.03 | 2.11% | First half of 2027 |
Now annualize. Neither company gave an exact date, so the table below uses scenario dates. December 31, 2026 is the outer edge of Pacira's guidance; November 30, 2026 is an illustrative earlier close, not company guidance. For Varonis, March 31 and June 30, 2027 bracket the "first half" window.
| Scenario | Days from Oct 16, 2026 | Annualized (simple) |
|---|---|---|
| $PCRX closes Nov 30, 2026 | 45 | 3.57% |
| $PCRX closes Dec 31, 2026 | 76 | 2.11% |
| $VRNS closes Mar 31, 2027 | 166 | 4.65% |
| $VRNS closes Jun 30, 2027 | 257 | 3.00% |
The Varonis tape needs context. Its release priced the offer at a 52% premium to the $32.71 close on June 22, 2026, before initial sale rumors, and 17% above the $42.35 close on September 1, 2026, before further media reports. The stock closed at $46.76 on September 2 and even finished at $50.12 on October 9, above the $49.75 that was eventually announced. It closed at $47.34 on October 15 and $48.72 on October 16, on about 36.3 million shares versus about 2.7 million the day before. Much of the premium was in the price before the deal was official. More on that in our Varonis takeover and merger arbitrage spreads coverage.
Compare it with a T-bill
The honest benchmark for any spread is the risk-free rate. On October 16, 2026, the Treasury's daily bill rates put the 13-week bill at 4.18% and the 26-week bill at 4.35%, coupon-equivalent basis.
Line them up. Pacira's 2.11% to 3.57% annualized sits below the 13-week bill. Varonis' 3.00% to 4.65% brackets the 26-week bill. On paper, an arb in Pacira at Friday's close earns less than a T-bill for taking on deal risk.
That happens. It usually means the market expects an earlier close than the conservative date, sees very little risk, or assigns some value to the chance of a higher bid. The math says the reward is thin; it does not say which explanation is right.
The downside math: what a broken deal costs
The spread is the upside. The downside is where the stock might trade if the deal dies, and it is almost always much bigger.
For Pacira, the last close before the announcement was $25.20 on October 7, 2026; it closed at $36.39 on October 8. If a broken deal sent the stock back to $25.20, the loss from $36.34 would be $11.14 per share against $0.16 of upside, roughly 70 to 1. That fall-back level is an assumption: a busted deal can trade above or below the pre-deal price, depending on what changed in the meantime.
The same inputs give a rough implied probability of completion:
p = (P minus D) divided by (O minus D), where P is the market price, O is the offer and D is the assumed broken-deal price.
| Target | P (Oct 16, 2026) | O | D (assumed) | Upside | Downside | Implied p |
|---|---|---|---|---|---|---|
| $PCRX | $36.34 | $36.50 | $25.20 (Oct 7 close) | $0.16 | $11.14 | 98.6% |
| $VRNS | $48.72 | $49.75 | $42.35 (Sep 1 close) | $1.03 | $6.37 | 86.1% |
| $VRNS | $48.72 | $49.75 | $32.71 (Jun 22 close) | $1.03 | $16.01 | 94.0% |
For Pacira: (36.34 minus 25.20) divided by (36.50 minus 25.20) = 11.14 divided by 11.30, about 98.6%. For Varonis the answer swings from 86.1% to 94.0% depending only on which "unaffected" price is used. That is the weak spot of the formula: D is a guess.
It also ignores time value. Part of Varonis' 2.11% is simply payment for waiting until 2027, so the simple formula understates how confident the market is. Treat the output as a rough gauge, not a forecast.
Stock deals: the spread moves with the acquirer
When the buyer pays in shares, or in cash plus shares, the offer value floats with the acquirer's stock:
Spread = (exchange ratio times acquirer price + cash per share) minus target price.
A hypothetical: the target trades at $38, the acquirer at $50, and the terms are 0.8 acquirer shares plus $2 cash. Deal value = 0.8 times $50 + $2 = $42, so the spread is $4, or about 10.5% of $38. To lock that in, arbs commonly buy the target and short 0.8 acquirer shares per target share, so a drop in the acquirer's price does not erase the spread.
Curaleaf's revised bid for Aurora Cannabis ($ACB) shows the moving part. Curaleaf offered US$1.00 in cash plus 0.4013 of a Curaleaf share per Aurora share, which it valued at US$5.00 using Curaleaf's C$14.21 close on October 2, 2026 at an exchange rate of 0.7015. It also raised the bid's cap price from US$5.00 to US$6.00 and extended expiry to December 4, 2026, according to its October 5, 2026 release. That US$5.00 changes every time Curaleaf's stock or the Canadian dollar moves.
What moves a spread
- Regulatory review. Under the HSR Act, parties to certain deals must notify the FTC and DOJ and "may not close their deal until the waiting period outlined in the HSR Act has passed" (FTC). Pacira's closing depends on that kind of waiting period expiring; Varonis needs regulatory approvals.
- Financing. Viatris plans to pay mainly from excess cash plus short-term borrowings. Thoma Bravo is providing committed equity financing and has debt commitments for the Varonis deal. Shaky financing widens spreads.
- Shareholder conditions. Pacira needs a majority of shares tendered. Varonis needs a shareholder vote.
- Competing or hostile bids. Aurora's board, on a special committee's unanimous recommendation, told holders on October 14, 2026 to reject Curaleaf's revised hostile bid, calling it inadequate and objecting that Aurora's own cash would help fund it and that holders would carry Curaleaf's share-price risk (our Aurora coverage). In contested situations the "spread" is less about time and more about who wins.
- Time. Every month of delay lowers the annualized return on a fixed dollar spread, which is why closing-date news alone can move a spread.
For more deal tape, options flow and breakout setups, the Wall Street War Room front page carries the latest.
Desk Notes
What the numbers say: At the October 16, 2026 close, $PCRX offered a 0.44% gross spread and $VRNS 2.11%. Annualized on stated timing, Pacira sits below the 4.18% 13-week bill and Varonis brackets the 4.35% 26-week bill.
What they don't: Whether either deal closes, or when. The broken-deal price is an assumption, the implied probabilities ignore time value, and gross spreads skip costs.
FAQ
What is a good merger arbitrage spread?
There is no fixed number. Traders compare the annualized spread with a T-bill over a similar horizon and weigh it against the downside if the deal breaks. A 0.44% spread on a deal guided to close by the end of 2026 is a different proposition from 2.11% on one guided to the first half of 2027.
Why would a stock trade above the offer price?
Usually because the market is pricing a chance of a higher or competing bid. Before a deal is signed, rumor-driven prices can also overshoot: Varonis closed at $50.12 on October 9, 2026, above the $49.75 announced on October 15.
How do you annualize a merger arb spread?
Multiply the percent spread by 365 divided by the days to the expected close. Use the company's stated timing, and if it is a range, run both ends as scenarios rather than picking the flattering one.
What happens to the spread if a deal breaks?
The spread disappears and the target reprices on its own merits, often toward its pre-deal level, though it can land above or below it. For Pacira, a return to the $25.20 October 7, 2026 close would mean an $11.14 loss from the October 16 close.