Hi everyone,
I hope you're all well. I had a quick question for you; I currently work for a Special Situations fund, and have an interview with a PM for a HF focused on Merger/Risk Arbitrage. I did a quick search on the strategy and found some threads, but was hoping for a bit more insight. Specifically, I was hoping for answers to the following questions:
-Are Merger/Risk Arb funds specifically focused on M&A or do strategies also include spin-offs, restructurings, etc. (for the most part)?
-From my understanding, DD is more qualitative than quantitative. Is this true? What type of valuation is utilized, given that this is the case?
-How is work life-balance at these kinds of funds? Typical hours? What would comp look like on average?
-Potentially the most pressing question I have is what are the exit opps? I read on another thread that M&A IB/Sell-Side are exits, and the strategy is a good segway into other event-driven funds, but how transferable is the skill set? My concern is that after a year or two I may become pigeon-holed as "Merger Arb guy". What would be other potential exits? Would a jump into distressed/other event-driven strategies be feasible? How about a transition into a fundamental L/S fund?
I sincerely appreciate your insights and help in advance, and any feedback you can provide is greatly appreciated.
-Are Merger/Risk Arb funds specifically focused on M&A or do strategies also include spin-offs, restructurings, etc. (for the most part)?
I would say a majority of the merger arb funds I come across run both hard catalyst and soft catalyst books within their portfolio. I think this ties into your exit opps questions, with soft catalysts (possible M&A, upcoming catalyst) you will doing a lot of fundamental analysis on these underlying companies trying to find what the floor is if an event doesnt happen and bull scenario cases. I think this type of analysis lends itself to a number of exit opps
As stated above, you have guys who only do announced deals (less risk, less reward) and guys who do pre-announced and announced deals. You tend to see the big blow ups in the funds that do a lot of pre-announced stuff, Paulson & Co comes to mind. Arb spreads are getting tighter and tighter and the strategy is not as lucrative as it once was back in the good old days when you had double-digit spreads on easy to understand deals. Many of the deals with juicy spreads today have serious anti-trust issues and are very binary in outcome.
In terms of the analysis, you tend to do the following stuff: (i) value the target company to see if the bid is a fair bid and also to quantify downside risk in the event that the deal breaks. This is standard valuation stuff using DCF's and multiples. (ii) You spend a lot of time talking to lawyers and other experts on trying to find out if a deal is likely to get blocked on anti-trust issues. This Sprint/TMUS or Bayer/Monsanto right now. (iii) if the deal has a stock component, you need to take a view on the value of the merged entity so you will do some M&A modelling to look at accretion & dilution analysis.
In terms of hours and work life, it varries by fund and also by how much risk the manager wants to take. A fund with 50-60 post-announced positions will likely have a lot lower stress than a fund with 10-20 pre-announed positions.
Comp varries again by fund but an experienced analyst should be able to make USD 350-500k all in and much more if the P&L structure is good and your PM is generous. Some PM's just want an analyst to cruch the numbers while they focus on the soft factors like anti trust so in that case your value add is much lower and comp might be at the low end of 300k all in. A good analyst/PM running the full process would see mugh more upside and into the 7 figure range.
Exits are likely into other equity strategies but I don't really see many guys moving as arb seems to attract a certain type of guy who likes thinking it terms of odds and binary outcomes. I would be surprised to see an arb guy move into distressed debt for example.