October 2016: The Busiest Month Ever For M&A

by: , CEO, IndexIQ by MainStay Investments
  • Qualcomm to buy NXP Semiconductors

  • AT&T buying Time Warner Inc.

  • British American Tobacco PLC makes $47 billion offer for Reynolds American Inc.

If it felt like October came with a wave of “mega-merger” news, that’s because it did. This month will go down as the busiest month ever for mergers and acquisitions (M&A) activity, with U.S. companies alone announcing merger agreements totaling $248.9 billion, according to the latest data from Dealogic. That tops the previous record set in July 2015, when there was $240 billion in deal making.

Just as noteworthy is the fact that all of these deals were announced before the resolution of the 2016 U.S. presidential election, after which the regulatory environment will likely become much clearer. Companies are not waiting, seeing opportunities for growth through large, strategic tie-ups and moving quickly to make them a reality.

As we wrote earlier this year in a blog post titled “Can M&A Activity Maintain Its Record-Setting Pace?”, the likelihood of additional merger activity as this year progressed appeared high as “interest rates remain at rock bottom levels, and many companies have healthier balance sheets and cash positions than they’ve likely had since the onset of the Great Recession,” and “the pace of M&A appears poised to remain brisk…” Conditions have not altered much in the seven months since we initially shared those thoughts, and given this momentum, it seems likely that deal making will remain strong as we head into the New Year.

For investors watching all of this unfold, the news has the potential to impact a portfolio in two ways. On the upside, M&A exposure is a play on the successful completion of an announced merger. On the downside, M&A exposure can potentially offer a low volatility source of downside protection. The idea that the same news generating blaring headlines can also provide drawdown protection may seem counterintuitive, but history backs up the approach.

The chart below displays a risk (standard deviation) and return analysis of the S&P 500 Index, a representative merger arbitrage strategy, and a 50/50 blend of the two. Year-to-date, the 50/50 blend provided a diversification benefit, with lower risk versus the S&P 500 Index, without giving up much of the return potential.

M&A Exposure Can Offer a Low Volatility Source of Downside Protection
Risk vs. Return (12/31/2015–10/31/2016)


Source: Bloomberg, as of 10/31/16.

In a market defined by both record-setting deal making and increased volatility, such a strategy can prove to be a useful addition to a portfolio.

Past performance is no guarantee of future results. Returns shown are for illustrative purposes only and do not represent the performance of any specific investment.

S&P 500 Index is widely regarded as the standard for measuring large-cap U.S. stock-market performance.

The Representative Merger Arbitrage Strategy is represented by the IQ Merger Arbitrage Index.

The IQ Merger Arbitrage Index seeks to achieve capital appreciation by investing in global companies for which there has been a public announcement of a takeover by an acquirer. Index returns include the reinvestment of dividends and capital gain distributions, but do not reflect any fees, expenses, or sales charges. Indices are unmanaged and an investor cannot invest directly in an index.

Drawdown is the peak-to-trough decline during a specific record period of an investment, fund, or commodity. A drawdown is usually quoted as the percentage between the peak and the trough. Drawdowns help determine an investment’s financial risk.

Standard deviation measures how widely dispersed a fund’s returns have been over a specific period of time. A high standard deviation indicates that the range is wide, implying greater potential for volatility.

Diversification cannot assure a profit or protect against loss in a declining market.

About risk

All investments are subject to risk and will fluctuate in value.

Alternative investments are speculative, not suitable for all clients, and intended for experienced and sophisticated investors who are willing to bear the high economic risks of the investment.

Merger arbitrage risk: Merger arbitrage is a type of investing strategy that seeks to exploit pricing inefficiencies that may occur before or after a corporate event, such as a bankruptcy, merger, acquisition, or spinoff. There can be no guarantee that such a strategy will be successful. The principal risk is that proposed takeover transactions may be renegotiated, terminated, or involve a longer time frame than originally contemplated for business reasons or due to regulatory oversight or for other reasons, in which case there may be a negative impact on return. There is typically far greater downside if the deal breaks than there is upside if the deal is completed.

The information and opinions contained herein are for general information use only. IndexIQ does not guarantee their accuracy or completeness, nor does IndexIQ assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are as of the date of this report and are subject to change without notice.

MainStay Investments® is a registered service mark and name under which New York Life Investment Management LLC does business. MainStay Investments, an indirect subsidiary of New York Life Insurance Company, New York, NY 10010, provides investment advisory products and services. IndexIQ® is an indirect wholly owned subsidiary of New York Life Investment Management Holdings LLC. NYLIFE Distributors LLC is located at 30 Hudson St., Jersey City, NJ 07302. NYLIFE Distributors LLC is Member FINRA/SIPC.


Adam Patti

CEO, IndexIQ by MainStay Investments

Adam is Chief Executive Officer and Founder of IndexIQ. Prior to founding IndexIQ, he led Fortune Indexes, a pioneer in the Exchange-Traded Fund (ETF) industry, having launched two ETFs back in 2000 in partnership with State Street Global Advisors

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