After tumbling to the lowest level in more than a decade in the second quarter, global M&A activity gathered steam in September. This is especially true following the flurry of latest deal activities.
The largest deal is Nvidia’s (NVDA - Free Report) buyout of UK-based chip designer Arm Ltd. from Japan's SoftBank Group Corp. for as much as $40 billion after weeks of speculation. It will represent the biggest acquisition in the history of the semiconductor industry (read: Nvidia's Buyout of Designer Arm Put These ETFs in Focus).
Other notable deals include Gilead Sciences’ (GILD - Free Report) purchase of cancer treatments’ specialist Immunomedics (IMMU - Free Report) for $21 billion. The deal, if approved, would be Gilead’s largest acquisition ever. Meanwhile, Verizon Communications (VZ - Free Report) agreed to acquire prepaid wireless service provider TracFone from America Movil (AMX - Free Report) for as much as $6.9 billion. The move comes as the largest U.S. wireless carrier seeks to expand its mobile business into the so-called prepaid market (read: Biotech ETFs Soar on Gilead-Immunomedics Deal).
Further, Oracle ORCL won the bid for the U.S. operations of TikTok, the popular mobile video app owned by Chinese company ByteDance, in a fight with Microsoft MSFT. While the terms of the deal have not been disclosed, it looks more like a corporate restructuring than an outright sale as proposed by Microsoft. Chinese e-commerce giant Alibaba Group BABA is also in talks to invest as much as $3 billion in the Southeast Asian ride-hailing firm Grab Holdings Inc., per the sources.
With the recent surge in deal making, global M&A volumes have approached $1.97 trillion so far this year, exceeding $1.26 trillion in 2009 and $1.6 trillion in 2010 during the same period after the 2008 financial crisis, according to Refinitiv data. Technology makes up almost a fifth of the total mammoth deals. The boost came from the digitalization push triggered by the pandemic. The acceleration in the global digital shift for everything ranging from remote working to entertainment and shopping has compelled companies to race changing consumer habits in order to gain market share. This move in turn is leading to consolidation across various sectors of the market.
How to Tap?
Investors could easily take advantage of this surge in deals by employing the merger arbitrage strategy in their portfolio. This strategy looks to tap the price differential (or spread) between the stock price of the target company after the public announcement of its proposed acquisition and the price offered by the acquirer to pay for the stock of the target company.
This is especially true given that investors should go long on the target or the acquired company and short on the acquiring company. When the deal is completed, shares of the target company will increase to the full deal price (in some cases slightly below the deal price), giving investors a nice profit.
Below we have highlighted few merger ETFs to ride out the surge from the increasing M&A deals. Any of these could make compelling options for investors seeking to implement this low correlation strategy to their portfolio:
IQ Merger Arbitrage ETF (MNA - Free Report)
This fund offers capital appreciation by investing in global companies for which there has been a public announcement of a takeover by an acquirer while at the same time providing short exposure to global equities as a partial equity market hedge. This is done by tracking the IQ Merger Arbitrage Index. The fund has 57 holdings in its basket with the largest allocation to Vivint Solar (VSLR) at 7.6% share while other firms hold no more than 6% share. The product has amassed $692.8 million in its asset base and trades in average volume of around 95,000 shares a day. It charges 77 bps in annual fees (read: Clean Energy ETFs in Focus on Sunrun-Vivint Solar Deal).
ProShares Merger ETF (MRGR - Free Report)
This product provides exposure to a global merger arbitrage strategy, which seeks to capture the spread between the price at which the stock of a company (a target) trades after a proposed acquisition is announced and the value (cash plus stock) that the acquiring company has proposed to pay for the stock of the target (a spread). This can be easily done by the S&P Merger Arbitrage Index. The fund holds a well-diversified portfolio of 30 stocks and charges 75 bps in annual fees. The ETF has been able to manage assets worth $7.6 million while it sees light volume of just 1,000 shares a day.
While investors could capitalize on merger arbitrage by trading in a particular target company stock, the ETFs provide a diversified exposure in the basket form with lower risk. Further, these could be excellent choices for investors in a rocky market due to their low correlation with the overall market.
This is because companies in merger and acquisition deals generally move independently, ignoring all other issues that influence the movement of other stocks. As a result, investors could definitely focus on these products for relatively higher returns in any type of market.
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