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Weekly Manager Views

21 February 2020

At GAM Investments’ Weekly Investment Meeting held on 19 February, Roberto Bottoli commented on key trends influencing deal-making activity and shared his outlook for the merger and acquisition (M&A) environment.

Merger arbitrage

Roberto Bottoli

  • 2019 proved to be a lively year for deal-making activity, despite headwinds such as US-China trade talks as well as sluggish economic growth. The S&P Merger Arbitrage Index – which measures the performance of stocks that are active in pending merger deals – ended the year in a positive fashion. In contrast with previous years, a higher number of domestic transactions compensated for fewer cross-border mergers.

  • So far in 2020, activity levels globally have been somewhat muted. Markets appeared to take a ‘wait and see’ approach during January, largely due to the emergence of the coronavirus threat and a slowdown in industrial production. That said, we have noticed a slight pick-up in the number of deals occurring in early February.

  • Median arbitrage spreads – the difference between the price of the target companies and the price offered by acquirers – have been around the 3% range during the last few months. Spreads reached a low after the G7 summit in June, when US and China officials had a constructive meeting. In our view, the widening in spreads looks constrained by the global hunt for yields against a backdrop of declining or negative rates.

  • Geographically, the US continues to be the core market in terms of deal-related activity, although we see interesting opportunities in Asia and select emerging markets. Outside the large-cap segment, we see opportunities to capture spreads on a risk-adjusted basis across small and mid-cap equity markets. In this area, antitrust risk is greatly reduced and funding is generally straightforward when compared to companies with high market values.

  • Although it has not been a spectacular start to the year in deal-making terms, we remain optimistic. Loose monetary policy continues to be helpful for the M&A pipeline over the medium term. We believe that a diversified and conservative risk arbitrage strategy can deliver attractive risk-adjusted returns independent of market direction.

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Source: GAM unless otherwise stated. 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. The mentioned financial instruments are provided for illustrative purposes only and shall not be considered as a direct offering, investment recommendation or advice. Reference to a security is not a recommendation to buy or sell that security.
February 2020