August 28, 2020 – We had seen early signs of a mergers and acquisitions renaissance earlier this summer, with a trickle of deals announced after a pronounced deal drought from March through May due to the pandemic.
Now, that trickle has turned into a flood. Sixteen M&A deals in North America were announced this month, representing an aggregate value of over $65 billion. August 2019 saw twenty-four deals announced, for an aggregate value of $45.8 billion. It’s safe to say that M&A is back!
Corporate confidence has returned to board rooms, making companies more comfortable pulling the trigger on deals. Since last month, the U.S. deal universe has expanded from 43 to 49. Investors’ nerves have been cooled as well, as the Accelerate AlphaRank Merger Arbitrage Effective Yield has declined from 12.2% to 8.1% since July, reflecting a lower risk premium. As things normalize, the average merger yield is trending down towards its pre-pandemic average yield of 4% to 6%. In addition, many of the deals announced after March’s market decline have been seemingly vaccinated, as any COVID-19 risks were taken into account in the drafting of merger agreements and therefore are not affected by adverse developments due to the coronavirus. Also, many pre-pandemic deals have closed, eliminating their previously high merger yields from the market.
Canadian M&A tends to be ignored by large arbitrage firms. This oversight is a mistake, given this can be one of the most lucrative areas of the market. For example, in August, three M&A deals closed in Canada and all three of these deals were beneficiaries of bidding wars which represented massive wins for arbitrageurs who participated:
- Guyana Goldfields ultimately received a cash consideration that was 208.3% higher than the initial bid given the back-and-forth bidding war that ensued. This deal was one for the record books given how lucrative it was for arbitrageurs.
- Seven Aces saw a 28.8% increase in consideration paid for its acquisition after a superior proposal emerged since the deal was first announced.
- Torstar shareholders received a 17.5% “bump” after another bidding group revealed a superior offer.
Since following the Canadian M&A space closely since 2007, I have not seen a month as rewarding as August was for arbitrageurs willing to invest in Canada. Given our stance on the matter, it shouldn’t come as a surprise that the Accelerate Arbitrage Fund (TSX: ARB) had positions in two of the three above mentioned deal targets. Guyana Goldfields was ARB’s largest position up until the deal closed this week.
In the U.S., we saw four deals close this month, including Advent’s troubled acquisition of Forescout, in which the buyer got cold feet and tried to walk away. Ultimately, cooler heads prevailed, and the deal proceeded at a lower price.
In August, one deal was terminated. Thermo Fisher dropped its bid for Qiagen after an insufficient number of the target’s shareholders supported the bid. Typically, in a failed deal, the target’s share price drops precipitously post deal break. However, concerning Qiagen, its shareholders refused to tender into Thermo’s bid, given that many felt it undervalued the company. Qiagen’s stock rallied higher after the bid failed.
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.