Special Situation Investing is an important part of value investing and different value investors call them by different names. For example, Warren Buffett $BRK.B calls them workouts.
Special Situation Investing happens when a company is having a corporate action and you buy the stocks to take advantage of that. For example, if the company is merging with another one, is having a spinoff, a debt restructuring, or a liquidation.
One form of workout is arbitrage when a company is going through a merger and the stock price is currently trading at a discount of the acquisition price. An arbitrage opportunity I have in my portfolio is Kansas City Southern $KSU .
If a company goes bankrupt, it may go through a debt restructuring or a liquidation. Here also, if you know what you're doing, there's the opportunity to make money. For example, I invested in Whiting Petroleum $WLL went it filed for bankruptcy last year.
A company may also issue warrants, preferred shares, special dividends, or convertible bonds. Very often, you will see spreads in these. For instance, a convertible bond might be selling at a discount of the stock price. What you can do is buy the convertible bonds, then make the conversation when you are able to, making a profit out of this spread.
Why do special situation investing? Usually, it is to have a low market correlation and if you find a really good deal, you may see a big risk-reward opportunity.