April 28, 2021 – Merger and acquisition activity continues to increase in parallel with the robust economic growth and rising market confidence accompanying the post-pandemic reopening.
The U.S. M&A market increased from 69 deals last month to 75 currently. The aggregate merger market is worth $532.8 billion, with $122.8 billion of deals announced in April. In dollar terms, deal activity this month is nearly double that was reported in March.
Merger yields remain in the 7-8% range, notably above the 5-6% range experienced pre-Covid. Perhaps risk arbitrageurs demand a higher risk premium these days to compensate for the traumatic experience of holding exploding spreads and skyrocketing yields back in March 2020. The complaint that “spreads are too tight” has been heard far fewer times over the past year. Given the relatively attractive risk premium baked into deal spreads, the Accelerate Arbitrage Fund (TSX: ARB) has been opportunistically adding to its merger arbitrage portfolio.
From a high level, there were two major themes in M&A this month:
- Regional bank merger activity is the highest on record. Month-to-date, there have been 8 public bank mergers announced, accounting for 40% of all M&A activity. Why has bank merger activity surged? After financials had underperformed for so long, the sector’s 22.7% year-to-date rally works wonders for corporate confidence. With their stocks hitting new all-time highs and outperforming the S&P 500 for the first time in ages, bank executives’ confidence is elevated, creating an ideal environment for deal activity. We expect this trend to continue.
- A bidding war broke out for railway Kansas City Southern. In the “Battle of the Canadians”, Canadian National Railway lobbed an unsolicited offer for Kansas City Southern this month in competition with would-be friendly KSU acquiror Canadian Pacific Railway, who struck a friendly deal for the American railroad one month prior. Both Canadian railways are keen to acquire KSU, the last “buyable asset” given the extremely limited number of competitors in the sector, to create a North American railroad and harvest the substantial cost savings available. CN’s $33.7 billion bid for KSU is the largest unsolicited proposal since Xerox’s $35 billion failed hostile bid for HP last March. The winner of the KSU auction will face a complex regulatory review, the implications of which will have a profound effect on North American transportation for decades to come.
Aside from the Genworth deal terminating this month, which is to no one’s surprise given the acquisition was announced back in 2016, the macro environment remains highly supportive of M&A and, as such, deal break risk will stay low until circumstances change.
The below AlphaRank Merger Monitor represents Accelerate’s proprietary analytics database on all announced liquid U.S. mergers. The AlphaRank Merger Arbitrage Effective Yield represents the average annualized return of all outstanding merger arbitrage spreads and is typically viewed as an alternative to fixed income yield.
Each individual merger is assigned a risk rating:
- AA – a merger arbitrage rated ‘AA’ has the highest rating assigned by AlphaRank. The merger has the highest probability of closing.
- A – a merger arbitrage rated ‘A’ differs from the highest-rated mergers only by a small degree. The merger has a very high probability of closing.
- BBB – a merger arbitrage rated ‘BBB’ is of investment grade and has a high probability of closing.
- BB – a merger arbitrage rated ‘BB’ is somewhat speculative in nature and has a greater than 90% probability of closing.
- B – a merger arbitrage rated ‘B’ is speculative in nature and has a greater than 85% probability of closing.
- CCC – a merger arbitrage rated ‘CCC’ is very speculative in nature. The merger is subject to certain conditions that may not be satisfied.
- NR – a merger rated NR is trading either at a premium to the implied consideration or a discount to the unaffected price.
The AlphaRank merger analytics database is utilized in running the Accelerate Arbitrage Fund (TSX: ARB), which may have positions in some of the securities mentioned.
* AlphaRank is exclusively produced by Accelerate Financial Technologies Inc. (“Accelerate”). Visit AccelerateShares.com for more information. Disclaimer: This research does not constitute investment, legal or tax advice. Data provided in this research should not be viewed as a recommendation or solicitation of an offer to buy or sell any securities or investment strategies. The information in this research is based on current market conditions and may fluctuate and change in the future. No representation or warranty, expressed or implied, is made on behalf of Accelerate as to the accuracy or completeness of the information contained herein. Accelerate does not accept any liability for any direct, indirect or consequential loss or damage suffered by any person as a result of relying on all or any part of this research and any liability is expressly disclaimed. Accelerate may have positions in securities mentioned. Past performance is not indicative of future results.