Risk Is Back for Hedge Funds Chasing Glut of Mergers: Real M&A
2014-12-14 17:00:01.0 GMT
(for a Real M&A column news alert: {SALT REALMNA <GO>}.)
By Tara Lachapelle, Angus Whitley and Brett Foley
(Bloomberg) -- Merger-arbitrage traders didn’t have enough
risk last year. This year, they got more than their share -- and
it’s not going away.
Companies announced $2.8 trillion of acquisitions, making
2014 the busiest year since before the financial crisis.
Unprecedented amounts of money were spent in some industries,
such as pharmaceuticals, and the transactions skewed larger than
at any other time this century, according to data compiled by
Bloomberg. The slew of deals gave merger-arbitrage traders
plenty to wager on, after last year’s scarcity of profit
opportunities.
The explosion of megamergers brought volatility back to the
investing strategy. The deals have been fraught with challenges,
from regulatory scrutiny to the plummeting price of oil and the
government’s attempt to deter tax inversions. Betting on them
didn’t always pay off. More than $100 billion of potential
takeovers unexpectedly blew up, like when drugmaker AbbVie Inc.
called off its $55 billion purchase of Shire Plc. That burned
merger-arbitrage funds, some of which will end the year at a
loss even as stocks around the world surge.
“Drought conditions turned into basically flood conditions
this year,” Louis Meyer, a New York-based event-driven analyst
for Oscar Gruss & Son Inc., said in a phone interview.
“Volatility is good, but it can be a double-edged sword. The
positive aspect is you do have deals and the trend seems to be
continuing. On the other hand, you’ve had real risk emerge and
portfolio managers can no longer work on cruise control.”
Merger Spreads
This is how merger arbitrage is supposed to work: Company A
announces that it’s buying Company B. Over the time that it
takes for the deal to close, the target’s stock should rise to
the same price as the acquirer’s offer. Traders take positions
to capture that spread and reap a profit when the deal is
completed.
There was too much investor money chasing too few
transactions in 2013, so spreads were very tight and profits
were small. Acquisitions that were pending completion around
this time last year had a median spread of just 1.7 percent,
compared with 4 percent now, data compiled by Bloomberg show.
In the U.S., the largest deals have some of the widest
spreads. Oilfield-services provider Baker Hughes Inc. is trading
about 11 percent below Halliburton Co.’s $38 billion offer as
oil prices have continued to slump. Regulatory risk has left
gaps of more than 5 percent in other big deals including the $26
billion merger of cigarette makers Reynolds American Inc. and
Lorillard Inc., AT&T Inc.’s $66 billion purchase of DirecTV, and
Comcast Corp.’s $68 billion takeover of Time Warner Cable Inc.,
the biggest transaction of the year.
Deal Blowups
All the activity is good for investors who speculate on
deals, unless of course the situations unravel. Two days this
year dealt huge blows to traders. On Aug. 6, Sprint Corp. ended
talks to buy T-Mobile US Inc., and Twenty-First Century Fox Inc.
withdrew its bid for Time Warner Inc. Then in October, AbbVie
got cold feet over its Shire deal, which would have been the
largest tax inversion on record. Shire’s stock plunged 28
percent in two days.
“There have been an unusually large number of deal
cancellations recently making it very difficult to generate
positive returns,” Keith Moore, an analyst for MKM Partners,
said in a note to clients after AbbVie-Shire broke down. This
week, describing the risk-arbitrage environment, he said “a lot
of comments come to mind: difficult, volatile, surprising,
unpredictable or the ultimate roller-coaster ride.”
The Bloomberg Global Merger Arbitrage Hedge Funds Index was
climbing in the first half of 2014, but is now down 1 percent
for the year. The Standard & Poor’s 500 Index has gained 8.3
percent.
Going Global
Deals are on the rise in other parts of the world, too,
with a 31 percent jump in European takeovers and a 33 percent
increase in Asia. Europe hasn’t seen as many large transactions
stumble, with the exception of Pfizer Inc.’s failed cross-border
pursuit of London-based AstraZeneca Plc. Spreads also haven’t
been as wide in Europe as in North America and Asia, though
European deal activity probably will pick up next year.
In Asia, the perils have often outweighed the potential
rewards. Investors have attached more risk to Australian deals
than those in any other Asian market, according to data compiled
by Bloomberg. The chances of picking the final outcome may be
too slim, even for traders who specialize in betting on
potential takeovers, said Tristan K’Nell, Sydney-based head of
trading at Quay Equities.
“Definitely you want to see some upside, but just in the
short term, we’re probably seeing a little too much risk to
actually put the deals together,” he said by phone.
Iron Slump
The price of iron ore, Australia’s biggest export, has
plummeted about 49 percent this year and investors are concerned
about an economic slowdown in China, the world’s biggest buyer
of the commodity and Australia’s largest trading partner.
Economic growth in Australia unexpectedly slowed for a second
straight quarter in the three months ended September.
Goodman Fielder Ltd., Australia’s largest baker, is trading
8.1 percent below the value of a bid from palm oil producer
Wilmar International Ltd. and Hong Kong investment group First
Pacific Co. That offer had already been cut after the suitors
studied Goodman’s accounts and the deal still needs Chinese
regulatory approval.
Bradken Ltd., an Australian supplier of mining equipment,
is trading 12 percent shy of a reduced A$872 million offer from
Bain Capital Asia and Pacific Equity Partners. Transfield
Services Ltd., the builder of Melbourne’s Gateway Bridge, is 13
percent under the value of an initial A$1 billion bid from
Ferrovial SA.
‘Zero Tolerance’
Some deals in Australia have fizzled before terms have been
set. Private equity suitors including KKR & Co. failed to follow
through with initial offers of A$3.4 billion for Treasury Wine
Estates Ltd., the maker of Penfolds Grange wine. And an
indicative bid of as much as A$1.1 billion for Australian
standards company SAI Global Ltd. from Pacific Equity Partners
also never led to a final offer.
“There is zero tolerance” regarding transactions where an
agreement hasn’t yet been reached, James Santo, a special
situations trader at Aviate Global in Sydney, said by
phone.“Even in the event of a binding agreement, you want to
see low regulatory risk and a high chance of completion.”
As a rule, traders would prefer an environment with more
deals, even if it means more volatility. That said, it takes a
lot of work and a broad set of skills to navigate the risks and
still make money.
Arbitrage “requires a full tool belt just to compete,”
Meyer at Oscar Gruss said. “We’re back in an environment where
all of a sudden, all the tools need to be taken out of the belt
because they’re all going to be needed.”
For Related News and Information:
Merger Speculators Taking $20 Billion Bath as Deals Come Asunder
Day of $100 Billion in Deals Evokes Exxon-Mobil Merger: Real M&A
John Paulson Leads Deal Magicians Amid Tighter Spreads: Real M&A
Live Merger-Arbitrage Spreads: MARB <GO>
Real M&A columns: NI REALMNA <GO>
Top deal stories: DTOP <GO>
To contact the reporters on this story:
Tara Lachapelle in New York at +1-212-617-8911 or
tlachapelle@bloomberg.net;
Angus Whitley in Sydney at +61-2-9777-8643 or
awhitley1@bloomberg.net;
Brett Foley in Melbourne at +61-3-9228-8721 or
bfoley8@bloomberg.net
To contact the editors responsible for this story:
Beth Williams at +1-212-617-2307 or
bewilliams@bloomberg.net
Mohammed Hadi
2014-12-14 17:00:01.0 GMT
(for a Real M&A column news alert: {SALT REALMNA <GO>}.)
By Tara Lachapelle, Angus Whitley and Brett Foley
(Bloomberg) -- Merger-arbitrage traders didn’t have enough
risk last year. This year, they got more than their share -- and
it’s not going away.
Companies announced $2.8 trillion of acquisitions, making
2014 the busiest year since before the financial crisis.
Unprecedented amounts of money were spent in some industries,
such as pharmaceuticals, and the transactions skewed larger than
at any other time this century, according to data compiled by
Bloomberg. The slew of deals gave merger-arbitrage traders
plenty to wager on, after last year’s scarcity of profit
opportunities.
The explosion of megamergers brought volatility back to the
investing strategy. The deals have been fraught with challenges,
from regulatory scrutiny to the plummeting price of oil and the
government’s attempt to deter tax inversions. Betting on them
didn’t always pay off. More than $100 billion of potential
takeovers unexpectedly blew up, like when drugmaker AbbVie Inc.
called off its $55 billion purchase of Shire Plc. That burned
merger-arbitrage funds, some of which will end the year at a
loss even as stocks around the world surge.
“Drought conditions turned into basically flood conditions
this year,” Louis Meyer, a New York-based event-driven analyst
for Oscar Gruss & Son Inc., said in a phone interview.
“Volatility is good, but it can be a double-edged sword. The
positive aspect is you do have deals and the trend seems to be
continuing. On the other hand, you’ve had real risk emerge and
portfolio managers can no longer work on cruise control.”
Merger Spreads
This is how merger arbitrage is supposed to work: Company A
announces that it’s buying Company B. Over the time that it
takes for the deal to close, the target’s stock should rise to
the same price as the acquirer’s offer. Traders take positions
to capture that spread and reap a profit when the deal is
completed.
There was too much investor money chasing too few
transactions in 2013, so spreads were very tight and profits
were small. Acquisitions that were pending completion around
this time last year had a median spread of just 1.7 percent,
compared with 4 percent now, data compiled by Bloomberg show.
In the U.S., the largest deals have some of the widest
spreads. Oilfield-services provider Baker Hughes Inc. is trading
about 11 percent below Halliburton Co.’s $38 billion offer as
oil prices have continued to slump. Regulatory risk has left
gaps of more than 5 percent in other big deals including the $26
billion merger of cigarette makers Reynolds American Inc. and
Lorillard Inc., AT&T Inc.’s $66 billion purchase of DirecTV, and
Comcast Corp.’s $68 billion takeover of Time Warner Cable Inc.,
the biggest transaction of the year.
Deal Blowups
All the activity is good for investors who speculate on
deals, unless of course the situations unravel. Two days this
year dealt huge blows to traders. On Aug. 6, Sprint Corp. ended
talks to buy T-Mobile US Inc., and Twenty-First Century Fox Inc.
withdrew its bid for Time Warner Inc. Then in October, AbbVie
got cold feet over its Shire deal, which would have been the
largest tax inversion on record. Shire’s stock plunged 28
percent in two days.
“There have been an unusually large number of deal
cancellations recently making it very difficult to generate
positive returns,” Keith Moore, an analyst for MKM Partners,
said in a note to clients after AbbVie-Shire broke down. This
week, describing the risk-arbitrage environment, he said “a lot
of comments come to mind: difficult, volatile, surprising,
unpredictable or the ultimate roller-coaster ride.”
The Bloomberg Global Merger Arbitrage Hedge Funds Index was
climbing in the first half of 2014, but is now down 1 percent
for the year. The Standard & Poor’s 500 Index has gained 8.3
percent.
Going Global
Deals are on the rise in other parts of the world, too,
with a 31 percent jump in European takeovers and a 33 percent
increase in Asia. Europe hasn’t seen as many large transactions
stumble, with the exception of Pfizer Inc.’s failed cross-border
pursuit of London-based AstraZeneca Plc. Spreads also haven’t
been as wide in Europe as in North America and Asia, though
European deal activity probably will pick up next year.
In Asia, the perils have often outweighed the potential
rewards. Investors have attached more risk to Australian deals
than those in any other Asian market, according to data compiled
by Bloomberg. The chances of picking the final outcome may be
too slim, even for traders who specialize in betting on
potential takeovers, said Tristan K’Nell, Sydney-based head of
trading at Quay Equities.
“Definitely you want to see some upside, but just in the
short term, we’re probably seeing a little too much risk to
actually put the deals together,” he said by phone.
Iron Slump
The price of iron ore, Australia’s biggest export, has
plummeted about 49 percent this year and investors are concerned
about an economic slowdown in China, the world’s biggest buyer
of the commodity and Australia’s largest trading partner.
Economic growth in Australia unexpectedly slowed for a second
straight quarter in the three months ended September.
Goodman Fielder Ltd., Australia’s largest baker, is trading
8.1 percent below the value of a bid from palm oil producer
Wilmar International Ltd. and Hong Kong investment group First
Pacific Co. That offer had already been cut after the suitors
studied Goodman’s accounts and the deal still needs Chinese
regulatory approval.
Bradken Ltd., an Australian supplier of mining equipment,
is trading 12 percent shy of a reduced A$872 million offer from
Bain Capital Asia and Pacific Equity Partners. Transfield
Services Ltd., the builder of Melbourne’s Gateway Bridge, is 13
percent under the value of an initial A$1 billion bid from
Ferrovial SA.
‘Zero Tolerance’
Some deals in Australia have fizzled before terms have been
set. Private equity suitors including KKR & Co. failed to follow
through with initial offers of A$3.4 billion for Treasury Wine
Estates Ltd., the maker of Penfolds Grange wine. And an
indicative bid of as much as A$1.1 billion for Australian
standards company SAI Global Ltd. from Pacific Equity Partners
also never led to a final offer.
“There is zero tolerance” regarding transactions where an
agreement hasn’t yet been reached, James Santo, a special
situations trader at Aviate Global in Sydney, said by
phone.“Even in the event of a binding agreement, you want to
see low regulatory risk and a high chance of completion.”
As a rule, traders would prefer an environment with more
deals, even if it means more volatility. That said, it takes a
lot of work and a broad set of skills to navigate the risks and
still make money.
Arbitrage “requires a full tool belt just to compete,”
Meyer at Oscar Gruss said. “We’re back in an environment where
all of a sudden, all the tools need to be taken out of the belt
because they’re all going to be needed.”
For Related News and Information:
Merger Speculators Taking $20 Billion Bath as Deals Come Asunder
Day of $100 Billion in Deals Evokes Exxon-Mobil Merger: Real M&A
John Paulson Leads Deal Magicians Amid Tighter Spreads: Real M&A
Live Merger-Arbitrage Spreads: MARB <GO>
Real M&A columns: NI REALMNA <GO>
Top deal stories: DTOP <GO>
To contact the reporters on this story:
Tara Lachapelle in New York at +1-212-617-8911 or
tlachapelle@bloomberg.net;
Angus Whitley in Sydney at +61-2-9777-8643 or
awhitley1@bloomberg.net;
Brett Foley in Melbourne at +61-3-9228-8721 or
bfoley8@bloomberg.net
To contact the editors responsible for this story:
Beth Williams at +1-212-617-2307 or
bewilliams@bloomberg.net
Mohammed Hadi