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Global merger and acquisitions are in a great shape this year. Worldwide M&A deals in the first quarter of 2018 breezed past $1 trillion, up about 33.5% year over year. The average deal value also surged about 42% in the first quarter to a 10-year high of $124 million, per KPMG.
Still-low interest rates in the United States, which may now last only a few quarters and the tax reform led the companies to make the most of the easy money era in the region. Low interest rates make borrowing cheaper and in turn put less stress on companies’ balance sheets, post acquisition.
Trump’s tax reform is another tailwind for M&A deals. Big companies have huge cash piles overseas and are likely to bring that cash back thanks to the one-time repatriation tax and an overall lower tax rate.This extra cash savings can easily be deployed on merger and acquisition activities.
On the other hand, M&A action has been picking up in Europe, with April representing the highest value of monthly deals in 10 years, according to Thomson Reuters’ data. This is probably happening because the ultra-low easy money policy along with QE measure is still in place on the other side of the pond.
The Trend Upbeat in Q2 Too
The trend is pretty solid even in the ongoing second quarter. Per Bloomberg, several companies have been announcing billion-dollar deals since April. It includes the merger of T-Mobile US Inc. and Sprint Corp., Marathon Petroleum Corp.’s takeover of rival oil refiner Andeavor, and J Sainsbury Plc’s purchase of Walmart Inc.'s Asda U.K. grocery chain. In the United States, deal volume is on its way to reach a new record if this deal making impetus remains.
On a global level, U.S.-based private equity firm Silver Lake is buying Zoopla-owner ZPG for £2.2 billion. Japan’s Takeda is buying London-listed rare disease specialist Shire for $62 billion, and U.S. cable giant Comcast is seeking approval for its bid to purchase British pay-TV group Sky. Foreign buyers are lately targeting the U.K. even more thanks to the subdued pound and compelling valuation. Then there was the world’s biggest e-commerce deal between Walmart and India’s Flipkart (read: Walmart Acquires 77% in Flipkart: ETFs in Focus).
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 buyer. 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 (see: all Hedge Fund ETFs here).
Below, we have highlighted two merger arbitrage ETFs to ride out the surge from increasing M&A deals. Any of these could make compelling options for investors seeking to implement this low correlation strategy to their portfolio:
This fund offers capital appreciation by investing in global companies for which there has been a public announcement of a takeover 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 product has amassed $532.6 million in its asset base and trades in average volume of about 150,000 shares a day. Costs come in at 77 basis points a year.
This product follows the S&P Merger Arbitrage Index. The index provides exposure to a global merger arbitrage strategy, which looks to capture the spread between the price at which the stock of a company trades after a proposed acquisition of such target is announced and the value that the acquiring company has proposed to pay for the stock of the target. The index takes long positions in target securities. The ETF has been able to manage assets worth $4.4 million.
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How to Play the Surge in Global M&A With ETFs
Global merger and acquisitions are in a great shape this year. Worldwide M&A deals in the first quarter of 2018 breezed past $1 trillion, up about 33.5% year over year. The average deal value also surged about 42% in the first quarter to a 10-year high of $124 million, per KPMG.
Still-low interest rates in the United States, which may now last only a few quarters and the tax reform led the companies to make the most of the easy money era in the region. Low interest rates make borrowing cheaper and in turn put less stress on companies’ balance sheets, post acquisition.
Trump’s tax reform is another tailwind for M&A deals. Big companies have huge cash piles overseas and are likely to bring that cash back thanks to the one-time repatriation tax and an overall lower tax rate.This extra cash savings can easily be deployed on merger and acquisition activities.
On the other hand, M&A action has been picking up in Europe, with April representing the highest value of monthly deals in 10 years, according to Thomson Reuters’ data. This is probably happening because the ultra-low easy money policy along with QE measure is still in place on the other side of the pond.
The Trend Upbeat in Q2 Too
The trend is pretty solid even in the ongoing second quarter. Per Bloomberg, several companies have been announcing billion-dollar deals since April. It includes the merger of T-Mobile US Inc. and Sprint Corp., Marathon Petroleum Corp.’s takeover of rival oil refiner Andeavor, and J Sainsbury Plc’s purchase of Walmart Inc.'s Asda U.K. grocery chain. In the United States, deal volume is on its way to reach a new record if this deal making impetus remains.
On a global level, U.S.-based private equity firm Silver Lake is buying Zoopla-owner ZPG for £2.2 billion. Japan’s Takeda is buying London-listed rare disease specialist Shire for $62 billion, and U.S. cable giant Comcast is seeking approval for its bid to purchase British pay-TV group Sky. Foreign buyers are lately targeting the U.K. even more thanks to the subdued pound and compelling valuation. Then there was the world’s biggest e-commerce deal between Walmart and India’s Flipkart (read: Walmart Acquires 77% in Flipkart: ETFs in Focus).
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 buyer. 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 (see: all Hedge Fund ETFs here).
Below, we have highlighted two merger arbitrage ETFs to ride out the surge from 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 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 product has amassed $532.6 million in its asset base and trades in average volume of about 150,000 shares a day. Costs come in at 77 basis points a year.
ProShares Merger ETF (MRGR - Free Report)
This product follows the S&P Merger Arbitrage Index. The index provides exposure to a global merger arbitrage strategy, which looks to capture the spread between the price at which the stock of a company trades after a proposed acquisition of such target is announced and the value that the acquiring company has proposed to pay for the stock of the target. The index takes long positions in target securities. The ETF has been able to manage assets worth $4.4 million.
Want key ETF info delivered straight to your inbox?
Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>