The Weird Side-Benefit Of A Risky Dealmaking Market

The Weird Side-Benefit Of A Risky Dealmaking Market
Theodora Lee Joseph, CFA

over 1 year ago1 min

Source: Dealogic, FT calculations

It’s not been a great year for mergers and acquisitions, with macroeconomic volatility, skittish debt markets, and regulatory scrutiny making announced deals more likely to collapse. And investors are wise to the risk: you can see in the chart above that the stock prices of takeover candidates like Activision Blizzard, Black Knight, and VMware are now trading at least 15% below the offered deal price. As for Twitter, it’s on a whole other level after Elon Musk said he was abandoning the deal altogether.

But while all this volatility isn’t great for the deals themselves, it brings out the best in merger arbitrage funds. These funds place bets between the period of when a deal is announced and when it closes, turning a profit from the gap – or the “spread” – between the target’s share price and its deal price. In other words, they benefit from the transition from uncertainty to certainty. So it stands to reason that the more volatility there is in the market, and the greater the risk that the deal will collapse, the more merger arbitrage funds stand to profit (as long as the deal doesn’t collapse, of course).

Market volatility isn’t showing any signs of tapering off, given a backdrop of more interest rate rises, inflationary worries, and recessionary risks. So this bodes well for merger arbitrage funds going forward. If you’re looking to benefit directly from their strategy (without trying to time the dealmaking process for yourself), the IQ Merger Arbitrage ETF (MNA, expense ratio: 0.77%) and AltShares Merger Arbitrage ETF (ARB, expense ratio: 0.67%) are a good place to start.



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