The common stock of the target company typically trades at a discount to the present value of the merger offer. This discount principally reflects the probability that the merger will not be consummated, though there are a number of other factors that influence the relationship between the present value of the merger offer and the target stock price. Included in this are the probability that a higher offer may be negotiated, either with the original acquiring firm or with a different suitor, which would tend to increase target stock price, and the difficulty involved in hedging the transaction, which would tend to decrease the target price. Strategies for mitigating these risks vary across managers. Some attempt to diversify this risk away by holding a large portfolio of different deals. Others focus on a few deals and attempt to estimate the exact probability that a particular merger will take place. Evidence on the success of merger arbitrage strategies typically finds that a diversified portfolio of hedged merger positions will earn excess returns over time. Market segmentation is frequently cited as a reason that target companies trade at a discount. The risks associated with Merger Arbitrage are different from the risks associated with analyzing common stock. Most equity investors are not comfortable with analyzing and bearing the risks associated with Merger Arbitrage, as their valuation models are not well suited to estimating the probability that a merger will fail, and their portfolios do not contain enough merger positions to diversify this risk away. As such, holders of the target company are generally willing to accept a small discount to fair value in order to shift those risks to arbitrage specialists who are better able to manage those risks.