Will M&A Continue to Boost Portfolios in 2018?

by: , Chief Investment Officer and Managing Director | IndexIQ

While it’s a fact that global M&A was down slightly from a record year in 2016, it’s hard to find too much fault with 2017’s global deal value: $3.15 trillion (compared to $3.26 trillion the year before, per Mergermarket). In the U.S., the numbers were about $1.5 trillion and $1.26 trillion, respectively, while the volume of U.S. deals was flat – 5,325 in 2016 and 5,326 in 2017.1 By any measure, that’s a pretty good year.

There’s reason to be optimistic heading into 2018 as well. The tax bill is now a reality, and should support increased corporate profitability. Companies have large cash reserves on their balance sheets and plenty of incentive to repatriate the billions of dollars now held abroad. Interest rates are still low. Companies still need to grow, enter new markets, and gain access to new products and ideas.1 All of these reasons and more were why we included a continued strong M&A environment among our Top ETF Trends and Insights for 2018.

The past year saw several deals that might be thought of as “transformational.” Most prominently, Amazon acquired Whole Foods in a $13 billion transaction, giving it a foothold in the brick and mortar end of the grocery business. CVS and Aetna proposed getting together in a combination valued at around $68 billion. Disney and Fox decided to get together.1 We expect more of these kinds of deals this year, as deregulation changes the playing field and technology becomes ever more disruptive.

As we have noted previously, there are various ways for investors to gain exposure to a robust M&A market. But, keep in mind that the most obvious way – trying to anticipate who’s going to acquire whom and when – is not necessarily the best way. In spite of the fact that there are thousands of deals every year, identifying buyers and sellers in advance of any transaction is not easy. To make it even more complicated, the market reaction to an announced deal may not be what an investor expects.

A merger arbitrage strategy generally seeks to avoid these complications. Instead of trying to guess who’s buying and selling in advance, it seeks to exploit the gap that often opens up post-deal announcement between the proposed price for a target company and the trading price. The strategy profits as that gap closes, driven by one of several factors: increasing market confidence that the deal will get done, speculation that another acquirer will come along and offer a higher price, or the movement of the deal towards completion at the announced price.

The returns from a merger arbitrage strategy have the potential to be more predictable and dampen overall portfolio volatility, based on the characteristics of a deal. There’s also a possibility of global diversification. According to Mergermarket, the U.S. accounted for just over 40% of deal activity in 2016, down from 45.5% the year before, and the lowest percentage since 2012.1 Global deals can provide exposure to non-dollar assets.

As the New Year gets underway, there’s general optimism in the dealmaker community that 2018 will see continued, strong M&A activity. For equity investors who want exposure to this trend, a merger arbitrage strategy provides one compelling approach.

1. Vlastelica, Ryan, ‘M&A activity slowed in 2017, and this year could be no better’, MarketWatch, 1/3/18.

About Risk:

All investments are subject to risk and will fluctuate in value. Past performance is not indicative of future results. An investment cannot be made in an index. Certain of the proposed takeover transactions in which the Fund invests may be renegotiated, terminated, or involve a longer time frame than originally contemplated, which may negatively impact the Fund’s returns. The Fund’s investment strategy may result in a high portfolio turnover, which, in turn, may result in increased transaction costs to the Fund and lower total returns. The Fund is susceptible to foreign securities risk – since the Fund invests in foreign markets, it will be subject to risk of loss not typically associated with domestic markets, including currency transaction risk. Diversification does not eliminate the risk of experiencing investment losses. Stock prices of mid-and small-capitalization companies generally are more volatile than those of larger companies and also more vulnerable than those of larger-capitalization companies to adverse economic developments. The Fund is non-diversified and is susceptible to greater losses if a single portfolio investment declines than would a diversified fund. The ETF should be considered a speculative investment with a high degree of risk, does not represent a complete investment program, and is not suitable for all investors.

Neither New York Life Investment Management LLC, its affiliates, nor representatives provide tax, legal, or accounting advice. Please contact your own professionals.

Merger Arbitrage (M&A) involves simultaneously purchasing and selling the stocks of two merging companies to create “riskless” profits and is often considered a hedge fund strategy.

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, are subject to change without notice. Past performance is no guarantee of future results.

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. ALPS Distributors, Inc. (ALPS) is the principal underwriter of the ETFs. NYLIFE Distributors LLC is a distributor of the ETFs and the principal underwriter of the mutual fund. NYLIFE Distributors LLC is located at 30 Hudson Street Jersey City, New Jersey 07302. ALPS Distributors, Inc. is not affiliated with NYLIFE Distributors LLC. NYLIFE Distributors LLC is Member FINRA/SIPC.


Salvatore J. Bruno

Chief Investment Officer and Managing Director | IndexIQ

Sal is Chief Investment Officer at IndexIQ, where his primary responsibility includes developing and maintaining the firm’s investment strategies. Sal joined IndexIQ in 2007 from Deutsche Asset Management (DeAM) where he held a number of senior positions

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