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The future’s bright for Merger Arbitrage

Felix Lo

Felix Lo

Portfolio Manager

Felix Lo

Felix Lo

Portfolio Manager
Felix has gained over 16 years’ experience as an event-driven Portfolio Manager. Felix previously spent 10 years at Sandell Asset Management where he was responsible for the firm’s global merger arbitrage and equity event driven portfolios and managing approximately USD 800m of AUM. He also spent 2 years at LMR Partners, where he managed the firm’s Global Merger Arbitrage and Event portfolio. Prior to joining the buy-side, Felix was a restructuring and M&A Analyst for Evercore Partners in New York. Felix graduated with a Bachelor of Science in Economics and a Bachelor of Science in Engineering, Magna Cum Laude, from the Wharton School & School of Engineering and Applied Science, University of Pennsylvania.
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The outlook for Merger Arbitrage strategies after the US election is quite positive, although investors should be aware of evolving regulatory, macroeconomic, and political conditions. Thus, some caution is needed, and deal selection is absolutely crucial. Here are some of the key reasons why we are excited about the prospects for the strategy going forward:

Deal Activity

Deal volumes across the globe are already significantly higher in 2024 than the previous year, even before the election. This was driven by fundamental strategic deals that usually have strong “follow through” in terms of subsequent activity. With the election behind us, we see significant optimism that deal activity will continue its strong trajectory in 2025.  

The future's bright for merger arbitrage chart
Source: Trium Capital & Bloomberg

Operating conditions are tough everywhere, with companies facing slowing revenue growth and costs still increasing. M&A, delivering synergies and margin expansion such as vertical integration, remains one of the few “easy” levers to pull to generate earnings growth in this challenging environment, especially for strong operators. Finally, strong equity performance and peaking interest rates meant companies had a strong currency to finance M&A. This has been a broadly global phenomenon.

Regulatory Environment

Current antitrust scrutiny has been a significant headwind for Merger Arbitrage strategies, especially around Larger Cap deals. This increase in scrutiny has been led by the US, but with the shift in administration, there is some optimism that Trump will take a more lenient antitrust policy. While he is broadly considered to be more business-friendly, the extent to which the US will dial back its enforcement efforts is still unclear – antitrust policy is one of the few areas where Republicans and Democrats have significant shared interests.

Even if there is a shift, it will take 3-6 months for the new staff to be in place to fully execute any policy change. We believe problematic deals will continue to be problematic, and thus, we continue to be cautious in this regard. Fortunately, markets continue to pay well above historical odds to hold regulatory risk, and there remains significant room for alpha generation. We are also seeing significant regulatory change outside the US, which creates additional complexity.

Spreads

Clean deal spreads have generally remained stable or slightly widened compared to October due to regulatory and geopolitical factors delaying deal closures. Looking at our investment universe, clean spreads are currently at around 8%, which is highly attractive.

Sector/Geography Dynamics

The increase in activity has been across the board in terms of geography and sectors, leading to a robust universe that provides attractive sources of diversification.  Premiums remain in line with historical averages, and despite strong equity valuations generally, valuations for deals are not onerous as acquirers continue to find deals that make financial and strategic sense.  All of this points to continued strength in dealmaking going forward.

 

In summary, we believe that despite some uncertainties, there are plenty of opportunities in under-researched areas where investors can be more than compensated for the risk they are taking. We are very optimistic going into 2025.

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