Thanks to low interest rates, cheap borrowing cost, healthy cash reserves, and a bull run in the stock market, the global space has been flooded with merger and acquisition (M&A) activities this year (read: 5 Best Performing ETFs of the 5 Year Bull Run).
According to the Mergermarket Trend report, the value of M&A across the globe has risen 33.2% year over year in the first quarter of this year to $599.1 billion. This represents the most energetic start since 2011 when the value reached $613.5 billion. U.S. deals make up for nearly 47% of the value while Europe accounts for about 27% of the deal value.
In terms of sectors, telecom led the way in the global M&A space with $101 billion deal value in the last quarter, closely followed by $82.7 billion for energy, mining and utilities companies, and $75.9 billion for the consumer sector.
Hot Brewing Deals
Telecom remains the forerunner with two top deals in place this year. The largest deal in the space is the $48.5 billion takeover of the second largest satellite TV provider DirecTV (DTV) by AT&T (T), the second largest US wireless operator. The transaction, pending shareholder and regulatory approvals, is expected to be completed within 12 months (read: ETF to Watch as AT&T Seeks to Buy DirecTV).
Upon completion, the acquisition will promote AT&T in the domestic pay-TV business to the second position behind the merged Comcast (CMCSA) behemoth. Comcast agreed to buy Time Warner Cable (TWC) for $45.2 billion and the transaction will likely be completed by the end of this year.
The other sizzling deals might come from the pharma space with Valeant Pharmaceuticals’ (VRX) $46 billion bid to acquire Botox-maker Allergan (AGN) and Pfizer’s (PFE) $118 billion buyout offer for the second-largest British drug maker AstraZeneca (AZN). Both the targeted companies have rejected the offers but the bidders are aggressively trying to beef up their proposals (read: Pharma M&A Frenzy Pushing These ETFs Higher).
Meanwhile, the Swiss pharmaceutical giant Novartis (NVS) and British drug maker GlaxoSmithKline (GSK) have entered into a multibillion dollar swap deal in which the former would buy the cancer drug business (oncology unit) of the latter for as much as $16 billion and in exchange sell its vaccine division, excluding influenza vaccines, to Glaxo for $7.1 billion.
How to Tap?
Investors could easily take advantage of this surge in deals by employing merger arbitrage strategy to 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 stocks of the target company.
This is especially true given that investors should go long on the target or 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.
While investors could capitalize on merger arbitrage by trading in a particular target stock, the ETFs provide diversified exposure in the basket form with lower risk. Below, we have highlighted two ETFs that could be excellent choices for investors seeking to implement this low correlated strategy to their portfolio in a rocky market (read: 3 Sector ETFs for This Shaky Market):
IQ Merger Arbitrage ETF ((MNA - ETF 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 provides short exposure to global equities as a partial equity market hedge. This is done by tracking the IQ Merger Arbitrage Index.
The fund has 39 holdings in its basket with the largest allocation to Morgan Stanley ILF/TREAS/INST, TWC and Forest Laboratories (FRX) on the long side. These three firms combined to make up for 38.4% share. The product has amassed $33.9 million in its asset base and trades in average volume of less than 10,000 shares a day. Expense ratio came in at 75 basis points a year. The ETF has added about 2% in the year-to-date time frame.
ProShares Merger ETF ((MRGR - ETF report) )
This product follows the S&P Merger Arbitrage Index, which is a benchmark that holds up to 40 publicly announced deals within developed market countries through a combination of long and, in certain cases, short security positions. The long position in each company in the index is kept at about 3% while short positions of the acquirer range from 0–3% (see: all Hedge Funds here).
TriQuint Semiconductor, Envestra and Tokyo Electron occupy the top three long positions in the basket. From a sector perspective, healthcare take the largest allocation while energy, consumer cyclical and utilities round off to the top four. The ETF has been able to manage assets worth $3.7 million while sees light volume of just nearly 1,000 shares. The fund charges 75 bps in annual fees from investors and has lost nearly 1.4% year-to-date.
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