Are mergers back?

by: , Chief Investment Officer and Managing Director | IndexIQ; IndexIQ,

Uncertainty is tough on markets, and we have had lots of that. A global pandemic, social unrest, and now, we’re less 100 days from the presidential election.

But stocks have been rallying, and companies are again showing an interest in mergers & acquisitions as evidenced by recently announced deals, including Chevron’s $5 billion deal to acquire Noble Energy and eBay’s $9.2 billion sale of its classifieds unit. The oil patch in particular seems set for significant consolidation as declining crude prices have left some companies overextended and vulnerable to takeover.

The potential acceleration in deal making could be a positive for merger arbitrage. The goal in this strategy is to take advantage of the inefficiencies that can occur when a deal target trades at a discount to the announced acquisition price, with this “spread” expected to tighten as the deal moves towards the closing date. Merger arbitrage is designed to capture this price difference while adding diversification to a portfolio.

The IQ Merger Arbitrage Index ETF (MNA) was the first and is still the biggest ETF employing this strategy. Newly announced deals keep the pipeline flowing, with those that meet the investment criteria as defined in the fund’s prospectus added to the underlying index. A rising market has tended to be positively correlated with M&A activity. Given the pricing dislocations resulting from the pandemic, we would expect to see more deals announced over the course of the year as acquirers go bargain shopping.

For fund investors, the primary factors that have driven performance remain the same: deal premiums and completion rates, both of which tend to be fairly consistent over time. This positions the fund to potentially deliver two of the key benefits of a merger arbitrage strategy: a low correlation to both stocks and bonds, and relatively stable returns across various market environments.

But deal flow is important, and it tends to follow the performance of the S&P 500 Index, so a rising market has generally meant more transactions. Now, as before, there are the usual factors driving consolidation, strategic and financial. But there may be something more impacting the market in the midst of the ongoing pandemic and the subsequent economic shocks. In any severe market dislocation like we’ve recently experienced, there will be winners and losers. Some companies – and their share prices – will recover faster than others. Others will see opportunity – the ability to acquire a competitor, a new technology, or to expand into a new market. An appreciating stock can supply the currency to see these transactions through.

While it’s too soon to draw any sweeping conclusions, it looks like the drought in M&A transactions brought on by the pandemic may be coming to an end, and that may be a good sign for investors in merger arbitrage strategies.

Past performance is no guarantee of future results, which will vary. All investments are subject to market risk and will fluctuate in value.

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

Click on the fund name for the most current fund page, which includes, the prospectus, investment objectives, performance, risk, and other important information. Returns represent past performance which is no guarantee of future results. Current performance may be lower or higher. Investment return and principal value will fluctuate, and shares, when redeemed, may be worth more or less than their original cost. Visit nylinvestments.com/etfs and nylinvestments.com/funds and for the most recent month-end performance

This material represents an assessment of the market environment as at a specific date; is subject to change; and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any issuer or security in particular.

The strategies discussed are strictly for illustrative and educational purposes and are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. There is no guarantee that any strategies discussed will be effective.

This material contains general information only and does not take into account an individual’s financial circumstances. This information should not be relied upon as a primary basis for an investment decision. Rather, an assessment should be made as to whether the information is appropriate in individual circumstances and consideration should be given to talking to a financial advisor before making an investment decision.

“New York Life Investments” is both a service mark, and the common trade name, of certain investment advisors affiliated with New York Life Insurance Company. IndexIQ® is an indirect wholly owned subsidiary of New York Life Investment Management Holdings LLC and serves as the advisor to the IndexIQ ETFs. ALPS Distributors, Inc. (ALPS) is the principal underwriter of the ETFs. NYLIFE Distributors LLC is a distributor of the ETFs. NYLIFE Distributors LLC is located at 30 Hudson Street, Jersey City, NJ 07302. ALPS Distributors, Inc. is not affiliated with NYLIFE Distributors LLC. NYLIFE Distributors LLC is a Member FINRA/SIPC.

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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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IndexIQ, a New York Life Investments Company, is a trusted provider of innovative financial solutions. IndexIQ ETFs are built and delivered in a way that provides exposures that investors can rely on. A subsidiary of one of the oldest and largest life insurance companies in the world, we have a solid foundation and the resources to continue our culture of innovation…

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