Merger Arbitrage

Through the latter half of 2020, companies continued to shift their focus from weathering the pandemic to implementing growth strategies, resulting in a surge in M&A in the fourth quarter. U.S. M&A volume increased 60% year-over-year—lifted by mega-cap deals in healthcare, technology, and financials—making it the sixth-strongest fourth quarter since 1998. The pandemic accelerated trends across all sectors—from how people work and communicate, to the way they purchase goods. The pandemic also revealed vulnerabilities, spurring CEOs to reposition their companies and boards to begin focusing on what the world will look like moving forward; this caused long-term strategic plans to be fast-tracked, pushing companies to M&A either out of necessity or due to a position of strength. Paired with positive COVID-19 vaccine news, the M&A spigot reopened as banks resumed making debt commitments.

While M&A has resumed, traditional deal processes have not, as the pandemic forced market participants to transform how they execute transactions. The once unthinkable prospect of completing a deal without a single in-person meeting has now become the norm.

Although COVID-19-related news continued to dominate the headlines, the U.S. presidential election was also a point of focus during the fourth quarter and into 2021, leading many to consider the potential impact of a new administration on M&A. Who is selected to lead the Department of Justice’s Antitrust Division and the Federal Trade Commission will set the tone for how risk arbitrage spreads trade and potentially which deals are announced. That said, a split Senate may make it difficult to enact sweeping changes to current antitrust laws. Additionally, the new administration’s approach to China could impact the M&A market, as tense U.S.-China relations led some companies to eschew M&A in recent years.

Turning to the investment side of M&A, risk arbitrageurs faced their most difficult year since 2008. The fourth quarter, however, saw the beginnings of a market healing itself. Spreads tightened through much of October and November, as a significant number of outstanding deals closed, including LVMH Moët Hennessy Louis Vuitton SE’s acquisition of Tiffany & Co. and Simon Property Group’s acquisition of Taubman Centers. Despite the challenges and pandemic-related uncertainty of 2020, the drivers behind the M&A boom of recent years are still present and potentially stronger. The U.S. Federal Reserve is incredibly accommodative, leading credit markets to provide companies with easy access to financing; private equity firms have a record amount of dry powder; the U.S. economy has stabilized and appears poised for growth; and the pandemic has accelerated the disruptive innovation trends that were pushing companies to be either buyers or sellers. Entering 2021, we believe the current breadth and depth of deals—and their respective spreads—are attractive and that the initial shock of the pandemic has passed as it relates to the M&A market.