Merger Arbitrage

U.S. M&A continued at an above-average pace during the second quarter. Year-over-year comparisons are skewed given that M&A volume was near record lows in the second quarter of 2020 due to COVID-19 and related shutdowns worldwide, so it is worth noting that total deal value in the second quarter of 2021 was 10% higher than the quarterly average for the past 20 years. Global M&A hit a record $1.5 trillion for the quarter, with the U.S. ranking as the most active country, attracting five of the top ten transactions.

Merger arbitrage spreads narrowed during April and May, as bumps and competing bids continued throughout the quarter. Six announced transactions experienced an interloping bidder, and three additional deals saw a bump in terms from the acquirer. The quarter’s headline deal announcement once again involved Kansas City Southern, as Canadian National Railway outbid Canadian Pacific, resulting in the latter’s agreed upon deal being terminated. The tides turned in June, and spreads widened as President Biden’s antitrust team started to take shape. Lina Khan, a progressive antitrust scholar, was sworn in as Chair of the Federal Trade Commission (FTC) on June 15th. The following day, the U.S. Department of Justice filed a lawsuit to block Aon plc’s proposed acquisition of Willis Towers Watson. Those two events caught the attention of arbitrage investors. Concurrently, the continued sparring and intensifying rivalry between the U.S. and China created a de-risking event, impacting the largest deals by market capitalization during the month of June. At quarter-end, the deal universe had an average annualized spread of 20%, aggregate deal value grew slightly to $430 billion, and the total arbitrage profit pool expanded to $25 billion.

In the first half of 2021, financial sponsors announced a five-year high of 13 M&A transactions worth over $1 billion, accounting for nearly $60 billion in total transaction value. Thoma Bravo’s acquisition of Proofpoint topped the list at $12 billion. Private equity firms are benefiting from considerable market tailwinds after businesses were disrupted by the initial outbreak of the pandemic last year as well as record fundraising, with U.S. PE dry powder at an all-time high of $150.1 billion.

M&A will continue to play a crucial role as companies work on repositioning themselves for the post-pandemic world. In addition to private equity’s record dry powder, S&P 500 companies—excluding financials—increased their cash holdings by 14% year-over-year, amassing a total of $2.13 trillion as of quarter-end. As Facebook, Apple, Amazon, and Google face bipartisan antitrust scrutiny, now is the time for their competitors to announce pro-competitive transformational transactions.