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Laxman Pai, Opalesque Asia: M&A patterns are showing healthy dynamics and a healthy number of hostile deals (usually riskier but more profitable) tend to concentrate on smaller targets, said Lyxor in its weekly brief.
Jumbo deals are increasingly funded by stock and cash combinations, also favorable for arbitrageurs. At 30% on average, deal premiums are attractive, yet not so high as to jeopardize operations.
All in all, by most measures, M&A activity, which sets the menu of opportunities for arbitrageurs, is consistent with mid-cycle patterns, neither too hot, nor too cold, the report said.
"The Merger Arbitrage backdrop is attractive given its strong diversification patterns. Well isolated from market volatility, swings in fiscal/regulation/trade policies are however unsettling. It contributed to moderate YTD returns (+1.5% on average)," said Lyxor.
Volatility in deal spreads spiked, forcing managers to reduce exposures or take higher risks.
Despite greater volatility, the risk of M&A break-up remained minimal (< 2% transactions failed), translating in elevated implied deal probability and contributing to compress merger spreads.
The average gross spread of 75 live and large deals stands at 6%, close to the long-term average. With only a few compelling bidding war situations and external flows from carry investors, the best deals were crowded, leading to several hits to merger portfolios this year.
The merger environment may seem currently ...................... To view our full article Click here
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