There’s nothing like a $75 billion M&A (mergers and acquisitions) deal to kick off the New Year.
On January 18, Microsoft announced that it plans to acquire Activision Blizzard, a videogame company, in an all-cash transaction for approximately that amount. (WSJ.com Jan 18, 2022) This came on the heels of a record year for deals in 2021, which saw global M&A value top $5.6 trillion, according to Dealogic (Reuters, December 30, 2021), easily beating the previous high of $4.55 billion, set in 2007.
Industry participants were, not surprisingly, confident that 2022 would be more of the same. A survey from the consulting firm Deloitte, conducted in the fall, found that 92% of respondents expected deal volume to increase or stay the same in 2022 (Deloitte 2022 M&A Trends survey).
The vibrancy of the M&A market tends to shine a light on merger arbitrage strategies, which seek to exploit the difference between the announced price of a deal and the post-announcement trading price of the target company’s stock. The differential that often emerges reflects in part the risk that a deal may not get done on time, or at all. As the deal moves towards completion the target stock price is generally expected to rise, allowing the arbitrager to pocket the difference in the two prices – the one at the time of the offer and the one at closing – by owning shares in the acquired company.
One way to get exposure to this strategy in a low cost, transparent vehicle is with the IQ Merger Arbitrage ETF (MNA). MNA utilizes a passive strategy of owning certain announced takeover targets, with the goal of generating returns that are representative of global merger arbitrage activity. The Index also includes short exposure to global equities as a partial equity market hedge.
Assuming the forecasts for deal activity are more or less correct, there will be plenty of transactions to choose from in 2022. Other potential benefits of the strategy include portfolio diversification and a low correlation to other asset classes. With volatility returning to stocks to start the year, this may be especially appealing.
There are other factors to consider, of course. As elsewhere in the markets, the near-certainty that the Federal Reserve will raise interest rates, most likely starting in March, is one. This will make borrowing more expensive for acquirors seeking to use leverage. But based on what is known about the Fed’s plans so far, it seems likely that the industry will adjust. Another worry has been the sheer volume of money flowing into the asset class and its impact on valuations. Valuations have definitely been moving up, and that may eventually impact deal flow, but so far this does not appear to be the case.
As always, no strategy is perfect for all investors all the time. But for those who want diversified exposure to the publicly-traded mergers & acquisitions marketplace – and to the equity market generally – we believe MNA offers an attractive option.
Past performance is no guarantee of future results, which will vary. All investments are subject to market risk and will fluctuate in value.
Diversification cannot assure a profit or protect against loss in a declining market.
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