Merger Arb Performance amid Trade War
Curious about Merger Arb desks performance assuming a lot of M&A deals got culled?
Also any intel on other strats would appreciate, especially the ones at risk of getting wrecked in this environment.
Merger arb is doing totally fine in this environment. These trades are very idiosyncratic and can work no matter the environment as long as the deal closes. If you owned a lot of predeal stuff, then that’s rough. But if you’re a pure traditional arb playing only announced definitive deals, you’re doing fine. The problem is that you’re not going to make money for awhile because no one will announce deals.
Love the confidently wrong post. Announced deal spreads have gotten blown out on anything with financing risk. Merger arbs are hurting just like everyone else in this environment
Jesus you’re myopic. The extent that arbs are getting hurt is absolutely nothing compared to what the l/s equity guys are going through. There is tremendous amount of vol in the fundamental stock picking world and arb is a safe haven in this environment. You might think arb is hurting but zoom out a little and you’ll see how insulated it has been. Sure maybe some spreads are widening obviously because downside is much lower now but let’s be real. The big deal spreads aren’t whooping around in this market on non deal related news. The biggest deals out there with attractive spreads are holding up just fine. If you think you’re hurting a lot in arb, that’s just lol
Nah man I know plenty of people on arb desks, no speculating here but feel free to spew bs from your sleepy SM seat. Its a quantifiable fact that deal spreads have widened over the last 2 weeks. No one on the arb side is immune to that
You’re just full of sht
I’m in an event and arb seat you fucking fool. The large cap strategic deals have held up totally fine. I guess these arbs you know aren’t very good then. 1-2% spread widening is nothing. Also if you’re market neutral, you’re short some beta on your trades dependent on probability of deal closing. And given the huge move beta move down, you’re decently compensated there too. Makes me feel better about my analysts when I see dumbass posts like this.
Mom and Dad are fighting again 😔
Nah ur just wrong sport
Can you explain what you mean when you say deal spreads
Your answer makes no sense. In this market environment, spreads are getting wider and probability of deals closing is getting lower. Arb desk that are net long spreads are losing money. There will also be much less M&A volume in a recession. Overall it's not good.
Who cares if spreads have widened 1-2%. You really think the probability of Hess, discover, Kellanova, US steel closing has decreased significantly because of the volatility in equity markets? Probability might have moved for other reasons and downside might be lower because of beta move but don’t kid yourself that the vol on these spreads have increased significantly more than the vol in l/s names. You sound like an arb who has a tiny book and has lost money while not being able to fathom how many other ppl might be doing just fine. Should’ve shorted some lbo spreads like many others dude. All the big arbs that dabble in the large cap space are doing fine.
Idk about US/EU but I know some APAC guys are making a fucking killing. Spreads are blown out and converge slower so they have more time to make more money when they're right.
Why APAC specifically?
Lots of fighting going on in here, so for non-arbs that are just curious, I’ll try to clear the air.
4 things can happen in a deal. 1. Closing on terms 2. Overbid and price bump 3. Deal completely falls apart 4. Price gets cut and deal still gets completed
For non-arbs, 1 is base case that is the overwhelming majority of deals. 2 is the years that arbs really make money and is rare, maybe 5% of deals. 3 is VERY BAD and guys get fired. A quick Bloomberg search shows the abundance of guys that got canned last year because of CPRI and some Chinese Biotech breaking, think most were at Millenium. 4 is bad but normally telegraphed/expected so arbs figure it out. Still lose money, but doesn’t cost the year, maybe just the month/quarter. Maybe 1-2% of signed deals.
3 and 4 become more likely, but still very unlikely, in times like these. 2 becomes virtually nonexistent in the “real deals” (not small cap crappers)
Thus, spreads change. Some spreads trade tighter in good times due to a higher perceived chance that someone else will come in, and either win the bidding war, or force a bump from the original company. (HEES is recent example of a separate company coming in, CTS CN is an example of original buyer bump)
“Crappy” LBOs in highly susceptible industries will widen out for a plethora of reasons, which aren’t that hard to figure out.
Some of the “mega deals” mentioned above (FYBR, K, HESS) sometimes get caught up in the insane LO/passive selling, and arbs take a while to step back in.
The buyers of above companies clearly have the resources and desire to complete deals (VZ, Mars, and CVX).
Also disputing that arbs are down on the year. My book is up, as are a few of the “public arbs” (HMEZX, MNA, ARB, MARB is down 5 bps YTD, so basically flat). Lots of things have went right this year (ITCI closing, X shares rallying 18% YTD, lots of smaller deals closing next week)
Happy to field criticism on any of this and will do my best to respond to questions or critiques.
Couple more thoughts in the edit… some risks become amplified. ANSS spread blew out on China risk of retaliation due to tariffs (was a very obvious short in hindsight, and I’d imagine most sold the long or got short fairly early into tariff craze)
Paper losses are also different in arb, because the deal is still there until it’s not. 1 of the 4 things will still happen, with most likely being the deal simply closes. In a strategy like arb, one blown deal can screw your whole year, so that’s why LBO deals widen out the most - highest odds of breaking.
Anybody from merger arb world able to explain me what the hell is going on with JHX price post Azek bid?
Yeah. Their core shareholder base thinks they overpaid and aren’t happy. They are even less happy that they don’t get to vote on it due to some obscure Aussie exchange waiver. Probably some tariff concerns/broader concerns about synergies. C suite is doing damage control from what I’ve heard. Obviously vdon’t know the company from a long term fundy side but hearing that it majorly screws the organic growth story/why people were invested in the first place.
So basically the first response saying arbs are doing "fine" and received a bunch of MS was the correct answer and there was a childish argument for no reason.
I would say most have lost 1-2% since liberation day, especially concentrated books. Definitely not great for arb, but since most that I know are flat/up across pods and arb shops and the public funds for the year, I tend to agree with you.
Yup. Guy above claiming I was wrong was just sad he’s down and is finding reasons to justify it and make him feel better. But was I childish too? Absolutely lol
correction: your strategy is cooked and you want to save face
I’m the OP that got so much shit in my first post and I’m here post mortem. I’m gonna be that asshole to reinforce the point that arbs were doing fine, and if you were correctly not bothered about 1-2% widening of spreads, you saw that widening as an opportunity instead of freaking out about the “pain” like the other guy above - you would’ve done just fine. Hess / X / discover / ANSS all closed and big wins for arbs. So much BS here sometimes
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