Alphaweek: Three Reasons the Future is Bright for Merger Arbitrage

06 Jan 2025

3 min

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Trium Khartes

Felix Lo recently featured in Alphaweek with an updated version of his Trium Talks blog ‘The future is bright for Merger Arbitrage‘. The article can be read on the Alphaweek website, but please see below the full copy:

Following the US election, multiple factors are driving a positive merger arbitrage outlook for 2025. The year ahead will require balancing opportunities while remaining mindful of evolving regulatory, macroeconomic, and political conditions.

While caution is needed, and deal selection remains absolutely crucial, there are four key reasons why we are excited about the prospects for merger arbitrage in 2025.

Deal activity picks-up

Deal volumes across the globe are already significantly higher in 2024 than the previous year, even before the US presidential 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 now see significant optimism that deal activity will continue its strong trajectory in 2025.

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.

Strong equity performance and peaking interest rates have also meant companies have a strong currency to finance M&A. This is not just a US phenomenon – it has been broadly mirrored across global markets.

Regulatory headwinds ease

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. Indeed, antitrust policy is one of the few areas where Republicans and Democrats have significant shared interests. We believe problematic deals will continue to be problematic, and thus, we continue to be cautious in this regard. Furthermore, even if there is a major shift in policy, it will take three to six months for the new political appointees to be in place.

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.

Diverse deal-making

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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