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After a Record Q3, Can M&A Soar in Q4? ETFs in Focus

Published 10/09/2020, 01:00 AM
Updated 07/09/2023, 06:31 AM

Mergers and acquisitions had a great third quarter as deal activities that were on hold amid the peak of coronavirus-led lockdowns opened the floodgates. A flurry of deals in September led to a record third quarter with more than $1 trillion worth of transactions globally, mostly tied to the coronavirus-proof sectors like technology and healthcare, according to Refinitiv data, as quoted on Reuters.

M&A activity in Q3 skyrocketed 80% sequentially. However, the start of the year was downbeat for a valid reason. Hence, M&A deals overall were down 21% at $2.2 trillion in the first nine months of 2020, with U.S. transactions coming in at $800 billion, marking a 43% decline year over year. Some of the Q3 deals are as follows.

Notable M&A Deals in Q3

ByteDance, TikTok’s Chinese owner, selected Oracle (NYSE:ORCL) to be its technology partner in the United States. Notably, Oracle is expected to assume management control of TikTok’s U.S. user data, per a Reuters article. Moreover, the software giant is negotiating to acquire a stake in TikTok’s U.S. operations, according to the same report.

Gilead Sciences, Inc. (NASDAQ:GILD) announced that it will purchase the oncology company Immunomedics (NASDAQ:IMMU) for a deal consideration of $88 per share in cash or approximately $21 billion.

Nvidia (NASDAQ:NVDA) agreed to acquire the UK-based chip designer Arm Ltd. from Japan's SoftBank Group Corp. for as much as $40 billion after weeks of speculation. It will mark the biggest acquisition in the history of the semiconductor industry.

The world's largest software maker Microsoft (NASDAQ:MSFT) plans to acquire ZeniMax Media Inc., owner of the storied video-game publisher Bethesda Softworks, for $7.5 billion in cash. This would represent its biggest video game purchase ever (read: ETFs to Gain as Microsoft Bets Big on Video Gaming).

What Lies Ahead for Q4?

While the upbeat deal-making mood is not likely to change totally in the fourth quarter, some euphoria is surely going to slow down. Along with many analysts, we too believe that sky-high valuation will come in the way of the deal making. Moreover, election uncertainty could also keep the momentum subdued in October as corporates may wait to see the outcome of the U.S. presidential election.

But then, interest rates will remain at the rock-bottom levels, which in turn will keep the appeal of the debt-financed deals alive. Be it “integrated debt, senior cash flow debt, asset-based financing, mezzanine debt, or unitranche debt” it all depends on interest rates. It is common knowledge that leverage buyouts and management buyouts are dependent on a company’s ability to acquire a loan at an attractive rate. So, deals will be there in the marketplace over the medium term.

ETFs in Focus

Investors could easily take advantage of this surge in deals by employing the merger arbitrage strategy in their portfolio. This strategy looks to tap the price differential (or spread) between the stock price of the target company after the public announcement of its proposed acquisition and the price offered by the acquirer to pay for the stock of the target company.

This is especially true given that investors should go long on the target or the acquired company and short on the buyer. When the deal is completed, shares of the target company will increase to the full deal price (in some cases slightly below the deal price), giving investors a nice profit (see: all Hedge Fund ETFs here).

IQ Merger Arbitrage ETF (MNA)

The underlying index of the fund looks to achieve capital appreciation by investing in global companies for which there has been a public announcement of a takeover by an acquirer. This differentiated approach is based on a passive strategy of owning certain announced takeover targets with the goal of generating returns that are representative of global merger arbitrage activity. The fund charges 77 bps in fees.

ProShares Merger ETF (MRGR)

The fund offers a rules-based approach for executing a merger arbitrage strategy. It is designed to provide an alternative source of returns not correlated to a portfolio's equity market holdings. MRGR charges 75 bps in fees.

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