GAM Investments’ Roberto Bottoli discusses a resurgent and increasingly competitive merger and acquisition (M&A) market and examines potential arbitrage opportunities related to special purpose acquisition companies (SPACs).
As vaccination rollouts gather pace around the world and economies reopen, corporate deal making continues to rebound sharply. Activity has surged, with many boardrooms opting for M&A as a route to address strategic priorities in a Covid-19 and post-pandemic environment. According to Refinitiv, the total value of pending and completed deals announced from the January-May period reached USD 2.4 trillion, an all-time record and a stark contrast to early 2020, when companies walked away from transactions amid the onset of the pandemic, leading to a dearth of deals. Now, an M&A recovery is turning into frenzy spanning a range of sectors, with notable deals across life sciences (Thermo Fisher’s USD 17.4 billion purchase of clinical research company, PPD), technology (Microsoft’s USD 19.7 billion acquisition of speech technology firm, Nuance Communications) and real estate (EUR 18 billion Deutsche Wohnen / Vonovia deal), as examples. In the meantime, the sensational increase in activity shows no signs of abating.
Arbitrage spreads higher than pre-pandemic
M&A has become an increasingly competitive process but, with much greater transaction volumes than in the past, merger arbitrage spreads (the gap between the deal price and the current share price) trade between 4.5% - 6.5%, higher than pre-pandemic levels. In some cases, shareholder activity has been more frequent and forced acquirers to increase bids. For example, ASTM, a highway operator in Italy, was the target of a minority buyout by its major shareholder in February and, in order to reach the squeeze-out threshold, the buyer increased the bid by roughly 9% in May to counter opposition from other shareholders. Separately, Mainstream, a provider of fund accounting services in Australia, became the target of two buyers in April, SS&C Technologies and Apex Group, and the counterbidding process is not over yet. In our view, such an environment is creating opportunities that can be positive if counterbids materialise. We even see opportunities to enter select situations at negative spreads, as long as such deals represent a reasonable price for an attractive counterbid scenario.
The SPAC craze took off in the second half of 2020 in the US on the back of the rallying equity market that prompted many private companies to look for a quick listing at favourable prices. The performance of SPACs after business combinations (as measured by the De-SPAC Index) and SPACs that have been announced, but not completed a business combination (as measured by the SPACs Deal Announced Index) is shown in Chart 1.
Chart 1: De-SPAC Index versus SPAC Deal Announced Index
The SPAC boom, which has drawn capital from many players including from the event-driven space, appears to be losing steam as criticism targeting excessive incentives for SPAC sponsors, over-optimistic earning projections by target companies, and a Securities and Exchange Commission (SEC) investigation, have cooled investor interest in these vehicles in recent weeks. We have never been involved in SPACs. In our view, SPACs are often too young and have untested business models and are being acquired by SPAC sponsors who are heavily incentivised to close deals at almost any price. However, we see opportunities wherein existing SPACs are illiquid and often trade below net asset value (NAV) which, in our view, can open arbitrage opportunities to buy SPACs below the NAV of the trust which is related to the SPAC.
A resurgent M&A market is providing a robust pipeline of new deals and we expect fiscal and monetary stimulus enacted by governments and central banks worldwide to support deal-making activity in the coming quarters. In our view, increasing exposure to a highly diversified set of deals in a timely manner could be beneficial in the current environment, given the positive combination of more deals and higher spreads. Meanwhile, select arbitrage opportunities in the SPAC market look compelling. As ever, we favour a disciplined merger arbitrage investment process based on a bottom-up approach seeking to deliver attractive risk-adjusted returns independent of market direction.
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 not a reliable indicator of future results or current or future trends. The mentioned financial instruments are provided for illustrative purposes only and shall not be considered as a direct offering, investment recommendation or investment advice. The securities listed were selected from the universe of securities covered by the portfolio managers to assist the reader in better understanding the themes presented and are not necessarily held by any portfolio or represent any recommendations by the portfolio managers. There is no guarantee that forecasts will be realised.