The Big Unwind of US Merger Bubble Bloodies Hedge Funds
by Wolf Richter
WolfStreet.com
May 12, 2016
The “arbs” got caught on the wrong side of the M&A collapse.
Hedge funds are getting bloodied in one of their favorite games, after years of a giddy boom in mergers and acquisitions with ever sillier valuations, made possible by an endless flow of easy money from yield-starved investors and fee-hungry banks, under the eyes of regulators who’d conveniently fallen asleep.
But that M&A bubble is now collapsing. And many hedge funds that were into merger arbitrage got caught on the wrong side of the bet.
Merger arbitrage is a bet that an announced acquisition gets completed. With the announcement, the share price of the target company shoots up to somewhere near the bid. If there’s hope that the bid will be raised, the share price might overshoot the bid. Once the target company agrees to be taken over, shares usually trade slightly below the acquisition price until the acquisition is completed. These price differentials can be exploited by merger arbitrage.
These can be huge, leveraged bets on what are expected to be minor price differences. Risks are thought to be low – unless the merger collapses. That’s when these “arbs” can get their heads handed to them.
This is now happening. So far this year just in the US, about $400 billion in deals have collapsed. It already blew past the full-year total of last year’s withdrawn deals of $231 billion and the 5-year average full-year total of $243 billion, according the Dealogic. Even if no more deals are withdrawn this year, the current total would already set a new full-year record.
This hangover from the multi-year merger bubble includes Pfizer’s $160 billion merger with Allergan, “the biggest withdrawn deal on record,” as Dealogic put it. It collapsed “two days after the US Treasury Department announced stricter rules for tax inversions.”
The Rest…HERE
