Hedge funds have got AMS AG over a barrel. The Austrian sensor maker this week made a desperate-sounding appeal to shareholders in Osram Licht AG to accept its 4 billion-euro ($4.4 billion) offer for the German lighting group, amid signs that merger arbitrage investors with a big block of Osram shares might not be ready to sell all of their stock. There are no easy options for AMS, and the market knows it.

The stand-off began in September when AMS first made the offer and subsequently mopped up a 20% Osram stake to see off a possible counterbid from private equity. But AMS has just replaced one enemy with another. Existing Osram shareholders sold and hedge funds probably control a sizeable stake now.

AMS’s offer failed to get the required acceptances, so the aspiring buyer returned a few weeks later with the same bid price and a lower hurdle for acceptance by the target’s shareholders, this time 55%. But there’s a risk it won’t reach that lower level either.

For starters, Osram’s register includes a large portion of Siemens AG shareholders who received stock when the lighting company was spun off from the German industrial giant. They might not even be aware that they own the stock.

At the same time, hedge funds have a financial incentive to not to sell at least part of their holdings. With just over half of the shares, AMS would control Osram’s governance but not its cash flow and it’s hard to believe this isn’t its ultimate ambition. To get there, it would need to deliver 75% of the votes cast at a shareholder meeting. The ideal situation for the hedge funds is that AMS gets slightly above 55% and then feels compelled to pay them extra for the additional 10-20% of the stock it would need for genuine control.

But the more the hedge funds keep hold of their stock to play this so-called “back-end” trade, the less likely it is that AMS will get even the 55% acceptances needed for its offer to prevail. Hence the current stand-off.

AMS has tried to put the frighteners on the hedge funds, warning that it won’t raise its offer and that it might not come back with another bid. The difficulty for the Austrian company is its blocking stake: If it walks away, it might struggle to sell that without taking a potentially big loss. That’s a reason to hang on. It would have been better to have secured provisional acceptances from Osram holders rather than spending money on a stake.

What’s more, it’s plausible that AMS might want to have another go at Osram in six months’ time. By then, it would have probably secured regulatory approvals for the acquisition. That would let it buy shares in the market taking its holding higher. If its stake crossed 30% it would be required to make a mandatory offer, with that back-end trade coming back into view.

Things might be simpler if one single hedge fund — for example Elliott Management Corp. — had emerged as a dominant force to negotiate a grand bargain. As things stand, the register is fragmented and hopes for a deal rest on assuming that the funds will act in their collective interest, instead of acting in their own interest and holding shares back. Good luck with that.

AMS’s lowering of the acceptance threshold looks like a tactical error that perversely may be encouraging individual shareholders to think the bid doesn’t need their help to scrape through. Meanwhile, Osram’s staff are enduring terrible uncertainty. It’s a mess for everyone.

To contact the author of this story: Chris Hughes at chughes89@bloomberg.net

To contact the editor responsible for this story: James Boxell at jboxell@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

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