Merger Arbitrage

As companies began the transition from weathering pandemic-related shutdowns to rebuilding and growing, the summer felt almost ordinary when it came to M&A volumes. In the new “Zoom economy,” it has become possible to conduct an entire deal process without a single in-person meeting. With the rise of these technology-enabled transaction processes, third quarter volumes recovered materially to typical summer levels, increasing more than 400% sequentially—albeit from a seriously depressed second quarter—and, more meaningfully, over 100% year-over-year. Unsurprising, healthcare led the way and represented over 50% of the deal value during the quarter. Looking to deals announced, six of the top ten transactions by market capitalization were in the healthcare sector, three of which were over $10 billion in equity value.

The environment continued to be a challenging one for risk arbitrage investors, even as spreads narrowed and finished the third quarter with a median annualized spread of 8%. Adverse events during the quarter were limited to Tiffany & Co. seeking special performance, as it proactively sued LVMH Moet Hennessy Louis Vuitton SE to close their agreed upon deal. As deals that were announced prior to the outbreak of COVID-19 closed, they were replaced with transactions that included pandemic-related seller protections and that carried low regulatory and duration risk. Given the upcoming U.S. presidential election and continued uncertainty about the ongoing pandemic, M&A activity in the near term may remain below historical averages despite the very bullish backdrop of the equity and credit markets. Looking past the election, M&A is likely to accelerate as clarity about the timing and rollout of COVID-19 vaccines and therapeutics increases. COVID-19 has also created additional opportunities for growth in M&A activity, as certain industries may be forced to consolidate and some companies may need to pursue a sale to ensure stability.