14 June 2017
Event Driven, M&A strategies typically delivered a solid performance during 2016, by virtue of a rise in global M&A activity in the second part of the year. This expanded the number of investment opportunities for managers to choose from, while the surprising outcome of the US elections was also seen as supportive since the Republican administration is expected to favour softer antitrust reviews going forward.
The momentum not only continued into the new year but accelerated markedly in January, making it the strongest start to a year for M&A volumes over the last decade. Nevertheless, it proved something of a controversial month, with some notable transactions encountering stumbling blocks.
It is for this reason that we only invest in announced, friendly deals, with a preference for low arbitrage spreads, in order to remove much of the potential downside associated with more dubious situations. Within this universe of deals, it is important to consider the rationale of the transaction, which has to make sense from an industrial and economic perspective; which regulators are required to approve the deal, who the main shareholders of the companies involved in the transaction are and what their view of the deal is.
As we look ahead to the remainder of the year the political background should be favourable to US domestic deals, given the expected softer stance on antitrust, the tax cuts and cash repatriation for multinational companies promised by Trump’s administration. Although, as we have already seen in respect of the proposed repeal and replacement of Obamacare, there is obviously some scope for disappointment if Trump is unable to deliver the promised reforms.
In Europe, we could experience a rise in M&A activity originated by US buyers, partly driven by USD strength. Although the greenback has given back some of its gains against the single currency during the first-half of 2017, it remains some 25% stronger than it was at the same stage in 2014.
From a sector perspective, regulatory-driven consolidation across regional US banks should continue; in the media sector we are seeing cable and satellite companies buying content producers, which is changing the competitive landscape and probably prompting more action.
As mentioned earlier, overall market activity has slowed since we witnessed stunning transaction volumes in January. This can probably be attributed to the one-off “Trump effect” on global financial markets. Meanwhile, arbitrage spreads are below the average recorded last year, but that is consistent with the robust levels of risk appetite that we are witnessing in a low volatility environment, the odd spike notwithstanding. We are likely to see more volatile markets going forward, especially given the difficulties that Trump is experiencing in his efforts to implement his reform agenda. In such a scenario, we can expect the arbitrage spreads to widen.
The key risks would appear to lie in miscommunicated / mismanaged adjustment of Fed policy, either in terms of interest rate rises or balance sheet reduction. Similarly, any potential shortfall in President Trump’s reform agenda could prove detrimental. But, by the same token, the approval of the proposed corporate tax cuts and cash repatriation measures would be likely to trigger a very positive reaction. Meanwhile, the appointment of the Republican heads of FTC and DoJ antitrust department should add some transparency to the approval process for many outstanding transactions.
Finally, with structurally supportive factors in place, including low funding costs and a broadening economic recovery, there are considerable grounds for optimism over the outlook for M&A strategies. Consequently, we anticipate that transaction numbers will remain at a healthy level, providing us with ample opportunity to generate alpha and maintain portfolio diversification in the period ahead.
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The information in this document is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained in this document may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information. Past performance is no indicator for the current or future development.