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Merger and acquisition activities across the globe hit record highs in the first half of 2018 driven by growing ambition of American companies.
According to the latest Thomson Reuters Deals Intelligence data, global mergers and acquisitions totaled more than $2.5 trillion, up 64% from the year-ago level and marked the strongest year-to-date period since records began in 1980. With this rise, the mergers are on track to surpass $5 trillion in 2018, which would top 2015, the highest yearly total on record (read: How to Play the Surge in Global M&A With ETFs).
The massive increase in M&A activity came despite growing global trade tensions. United States M&A volumes climbed 82% to $1 trillion, the country’s strongest period for deal making on record. This was followed by European deals, which nearly doubled to $767 billion in the first half.
Most of the boost came from media and healthcare deals. The proposed media M&A has totaled $322.5 billion so far – up more than six times from the year-ago level. The sector is poised for more consolidation in the coming months as a federal judge ruling on AT&T’s (T - Free Report) $85.4 billion purchase of Time Warner set the stage for waves of M&A in the media space that would change the landscape of the industry (read: Comcast Outbids Disney for Fox Assets: Media ETFs Surge).
Big deals have driven much of the activity as total number of deals valued at $10 billion or more surged to 36 in the first half of 2018. These constituted $950 billion in deals, or nearly 38% of all activity. The bidding war for Rupert Murdoch’s Twenty-First Century Fox (FOXA - Free Report) was the largest contributor. This was followed by health insurer Cigna’s (CI - Free Report) deal to purchase Express Scripts Holding for $67 billion and Japan’s Takeda Pharmaceutical purchase deal of Shire for $62.4 billion (read: Cigna to Buy Express Scripts: Healthcare ETFs in Focus).
The boom in M&A is likely to continue, given an accelerating economy, still-low interest rates, and tax reform, which allow companies to bring offshore cash back home. Potential cost savings through mergers are further fueling the urge to merge in the current ultra-competitive environment.
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 three 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:
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 61 holdings in its basket with the largest allocation to Rockwell Collins and Andeavor on the long side with each accounting for more than 8% share. The product has amassed $629.2 million in its asset base and trades in average volume of around 131,000 shares a day. It charges 77 bps in annual fees. The ETF has lost about 0.3% year to date (see: all the Hedge Funds ETFs here).
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 39 stocks and charges 75 bps in annual fee. Healthcare, financials, real estate and technology are the top four sectors. The ETF has been able to manage assets worth $4.5 million while it sees light volume of just 1,000 shares a day. It is down nearly 1% so far this year.
Bottom Line
While investors could capitalize on merger arbitrage by trading in a particular target company stock, the ETFs provide diversified exposure in the basket form with lower risk. Further, these could be excellent choices for investors in the 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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M&A Hits Record in 1H: Ride High With These ETFs
Merger and acquisition activities across the globe hit record highs in the first half of 2018 driven by growing ambition of American companies.
According to the latest Thomson Reuters Deals Intelligence data, global mergers and acquisitions totaled more than $2.5 trillion, up 64% from the year-ago level and marked the strongest year-to-date period since records began in 1980. With this rise, the mergers are on track to surpass $5 trillion in 2018, which would top 2015, the highest yearly total on record (read: How to Play the Surge in Global M&A With ETFs).
The massive increase in M&A activity came despite growing global trade tensions. United States M&A volumes climbed 82% to $1 trillion, the country’s strongest period for deal making on record. This was followed by European deals, which nearly doubled to $767 billion in the first half.
Most of the boost came from media and healthcare deals. The proposed media M&A has totaled $322.5 billion so far – up more than six times from the year-ago level. The sector is poised for more consolidation in the coming months as a federal judge ruling on AT&T’s (T - Free Report) $85.4 billion purchase of Time Warner set the stage for waves of M&A in the media space that would change the landscape of the industry (read: Comcast Outbids Disney for Fox Assets: Media ETFs Surge).
Big deals have driven much of the activity as total number of deals valued at $10 billion or more surged to 36 in the first half of 2018. These constituted $950 billion in deals, or nearly 38% of all activity. The bidding war for Rupert Murdoch’s Twenty-First Century Fox (FOXA - Free Report) was the largest contributor. This was followed by health insurer Cigna’s (CI - Free Report) deal to purchase Express Scripts Holding for $67 billion and Japan’s Takeda Pharmaceutical purchase deal of Shire for $62.4 billion (read: Cigna to Buy Express Scripts: Healthcare ETFs in Focus).
The boom in M&A is likely to continue, given an accelerating economy, still-low interest rates, and tax reform, which allow companies to bring offshore cash back home. Potential cost savings through mergers are further fueling the urge to merge in the current ultra-competitive environment.
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 three 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 61 holdings in its basket with the largest allocation to Rockwell Collins and Andeavor on the long side with each accounting for more than 8% share. The product has amassed $629.2 million in its asset base and trades in average volume of around 131,000 shares a day. It charges 77 bps in annual fees. The ETF has lost about 0.3% year to date (see: all the Hedge Funds ETFs here).
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 39 stocks and charges 75 bps in annual fee. Healthcare, financials, real estate and technology are the top four sectors. The ETF has been able to manage assets worth $4.5 million while it sees light volume of just 1,000 shares a day. It is down nearly 1% so far this year.
Bottom Line
While investors could capitalize on merger arbitrage by trading in a particular target company stock, the ETFs provide diversified exposure in the basket form with lower risk. Further, these could be excellent choices for investors in the 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.
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 >>