Mergers and acquisition activities across a number of sectors are picking up rapidly this year. Continued low interest rates are making borrowing cheaper and allowing companies to shore up their balance sheets. This suggests optimism over the global economy.
As per Dealogic, the value of mergers and acquisitions across the globe has risen 13% so far this year to $552.4 billion with 4,880 deals. This represents the highest level since the pre-financial crisis level of 2007. U.S. deals make up for nearly three-fifths of the value while China accounts for less than 10% of the deal value.
The telecom space so far has been at the forefront with the $45.2 billion takeover of Time Warner Cable (TWC) by Comcast (CMCSA). The transaction, pending shareholder and regulatory approval, is expected to complete by the end of this year (read: 3 ETFs to Watch on Comcast-Time Warner Cable Deal).
The second biggest deal comes from generic drug maker Actavis (ACT), which agreed to acquire Forest Laboratories (FRX) for $25 billion. The deal is expected to close in mid 2014 subject to regulatory approval.
This is followed by the $19 billion buyout of mobile-messaging startup WhatsApp by the social media giant Facebook (FB). The transaction is expected to be completed in August should it pass all the regulatory hurdles.
Further, Japanese beverage company – Suntory Holdings – will purchase U.S. spirits company Beam (BEAM) for $16 billion. The deal, pending regulatory approval, is expected to close in the second quarter and would make Suntory the world’s third-largest spirits maker.
How to Tap?
Investors could easily take advantage of this surge in deals by employing 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 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 (see: all Hedge Fund ETFs here).
Below, we have highlighted three merger arbitrage 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 (NYSEARCA:MNA)
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 35 holdings in its basket with the largest allocation to Morgan Stanley ILF/TREAS/INST, BEAM and LSI Corp. (LSI) on the long side. These three firms combined to make up for 35% share. The product has amassed $27.2 million in its asset base and trades in average volume of less than 7,000 shares a day. Costs come in at 75 basis points a year. The ETF has added about 3% year-to-date.