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January 24, 2014 at 08:53 AM
M&A activity jolted back to life in the middle of last year after lying in a near-comatose state for years.
Deal flow has increased, and — very important — more deals have been completed.
“Finally, CEOs are putting their capital to use,” said Adam Patti, chief executive of IndexIQ, an alternative investment manager. “They feel more comfortable with the economy, and perhaps more comfortable with the regulatory uncertainty that has been occurring. Perhaps, they just want to get to work.”
According to IndexIQ’s analysis of data from global developed markets, 856 deals were announced in 2012, 511 were completed and 98 were canceled. In 2013, 814 deals were announced, 612 closed and 98 were canceled.
Year to date, 35 deals have been announced, 26 have been completed and five canceled.
Patti is seeing the increased activity in his firm’s IQ Merger Arbitrage ETF (MNA), which debuted in November 2009, based on the firm’s two-year-old IQ Merger Arbitrage Index.
At times over the past few years, there were only 20 or 25 companies in the portfolio, he said. Now there are about 50.
“When deal flow increases,” Patti said in a recent telephone interview, “merger arbitrage strategies tend to perform better because they get to capture that spread.”
He said MNA’s performance, which was “pretty dismal for three years,” picked up last year. The fund was up 7.7% “with low volatility that is typical of merger-type strategies.”
Patti said the firm would increase its focus this year on the small fund, which ended 2013 with some $23 million in assets, “because we feel the trend is finally coming to fruition. We think it’s going to be a good year for M&A.”
The Fund
Patti said IndexIQ’s research showed that merger-arbitrage strategies lend themselves well to mechanical construction. Analysts examine data to identify attributes that merger arb portfolio managers consistently look for.
He and his colleagues studied 10,000 merger arb transactions over 10 years, looking for what made a successful deal versus an unsuccessful one. Dozens of criteria emerged.
