With Johnson & Johnson ( JNJ) finally agreeing to revised terms with Guidant ( GDT), merger arbitragers who are still willing to go long Guidant get paid a lot for their risk, say hedge fund managers.

"The spreads are enormously high, considering that the deal is in much better shape," says Jeffrey Cohen, founder of Saddle Brook, N.J.-based merger arbitrage hedge fund Silverado Capital Management. Cohen is involved in the trade, short Johnson & Johnson and long Guidant with a combination of stocks and calls.

Merger arbitragers generate returns in a merger by buying the stock of the target company and sometimes selling short the stock of the acquirer. The bet is that the merger target's shares will rise to the takeout price while the acquirer's shares will decline as it swallows a smaller rival.

If the deal fails to happen, arbitragers lose money. The time to the deal's completion and the probability that it will occur are two important variables used to estimate the rate of return in this trade. Generally speaking, the more likely a deal becomes, the narrower the spread between the target's stock price and the offer.

At the close of trading Tuesday, Guidant shares were trading about $2.67, or 4.4%, below the implied price of J&J's bid, which is a mix of cash and stock. That return, which translates to almost 34% on an annualized basis (assuming the deal closes in early January), is sweet for a deal like this one.

"It's unusually high by any standard. A 33% return without any use of leverage is unheard of, unless you perceive risk," says one arbitrage hedge fund manager.

Not everyone agrees that the trade is a free lunch. After all, following a series of regulatory setbacks at Guidant, J&J walked away from its old bid of $25.4 billion in stock and cash.

"Compared to most deals, yes, there is risk, because the fundamentals of the acquired company are in flux and uncertain," says Robert Faulkner, an analyst at JMP Securities who covers the stock. "If the sales of the cardiac rhythm management products the defibrillators and the pacemakers continue to decline, J&J could walk out of the deal. It's less the existence of future lawsuits than the trajectory of the sales that may trigger another cancellation of the deal," he says.

But Cohen says that spreads are unnecessarily wide because of fear that was exaggerated after J&J's first withdrawal, an event that -- along with several other blowups -- spooked the entire arbitrage community. "The Street is very nervous. That is because a number of situations have been treacherous," he says.

"There have been risks with the deal being called off and the litigation," says the other manager. "But overall, it is the market's nervousness. There is still a feeling that the Johnson & Johnson deal has some skittishness. And I don't share that feeling," he says.

"It's a very interesting opportunity," says Cohen.