(FROM THE WALL STREET JOURNAL 8/24/15)
By Shayndi Raice and Liz Hoffman
The gap between the price offered and the trading price of a
number of companies that are subject to pending takeover bids
widened dramatically last week, a sign of investor nervousness
about deals whose outcome could help determine whether the merger
boom continues.
The gap is known as an "arb spread" and serves as an indication
of what traders stand to make investing in a target company in
anticipation of a deal's completion. Wider spreads suggest eroding
confidence among investors that announced deals will close.
In the case of Royal Dutch Shell PLC's agreement to buy BG Group
PLC, the year's largest announced deal, the spread widened to 13.7%
Friday from 11.4% a week earlier. That is the widest since the deal
was announced in April, as investors fret over the possibility that
plummeting oil prices could cause Shell to walk away. The
oil-and-gas giant has said it is committed to the takeover, which
it says makes sense at virtually any oil price.
Spreads on other deals also increased sharply, including the $35
billion marriage of oil-field-services providers Halliburton Co.
and Baker Hughes Inc. and the $37 billion combination of chip
makers Avago Technologies Ltd. and Broadcom Corp.
Widening spreads don't necessarily mean deals are in trouble,
and spreads often fluctuate widely before mergers close. Walking
away from a takeover is costly, and market volatility usually
doesn't give a company grounds to do so.
But the moves reflect investor skittishness after some big,
high-profile deals failed to materialize last year and serves as a
reminder of the fragility of the M&A market.
Should any of the big, pending deals falter, it could give pause
to others contemplating major tie-ups.
With roughly $3 trillion in announced global merger volume,
according to Dealogic, this year is on pace to surpass 2007 as the
busiest ever for deal making. A key ingredient of the boom has been
lofty equity prices, which give buyers a strong currency for
acquisitions. A significant dent in them could jeopardize a record
finish.
Some hedge-fund managers who invest in deals said they are on
heightened alert following the market declines. Much of their focus
is on the roughly $70 billion Shell-BG combination, and the
possibility it could fall apart or be renegotiated. Some firms that
have placed bets on the deal said the chances of that are slim, in
part because Shell would have a difficult time finding another way
to boost its position in the natural-gas market so
significantly.
But they say there is a feeling among many deal traders that
they need to reduce some of the risk they are taking in the current
environment. That means unwinding positions, which causes spreads
to widen.
Despite providing an abundance of deals to choose from, the
M&A boom hasn't yet generated big profits for these
specialists, in part because many transactions haven't yet closed
and some still face regulatory challenges. Event-driven hedge
funds, which bet on mergers and other corporate shake-ups, were up
just 1.5% this year through the end of July, according to research
firm HFR Inc.
They were the worst performers among major hedge-fund strategies
in 2014, stung by AbbVie Inc.'s aborted takeover of Shire PLC and a
potential deal between Sprint Corp. and T-Mobile US Inc. that
failed to materialize.
For patient, steel-nerved investors, though, there could still
be big profits to be made. A wager placed Friday that Aetna Inc.
will complete its $34 billion takeover of rival health insurer
Humana Inc., for example, is set to return some 22% should the deal
close on schedule in late 2016.
The spread, which largely reflects nervousness that regulators
will reject the deal and possibly an accompanying tie-up between
Anthem Inc. and Cigna Corp., rose from 21.2% a week earlier. That
is a relatively modest move showing that not all spreads widened
dramatically last week.
Some of those who help arrange mergers say they aren't overly
concerned, with some pointing out that stock-price declines make
targets more affordable. But, they acknowledge, should this be the
start of a longer-term bear market, all bets are off.
"The biggest risk to deals was that equity prices would go up
too far, too fast," said Frank Aquila, a senior M&A partner at
law firm Sullivan & Cromwell LLP. "As long as the slide doesn't
become a rout, this should be good for M&A."
A bigger threat to the boom than falling stock prices could be
an evaporation of the easy credit that has fueled deal making.
Market declines could cause a temporary pause "as people collect
their thoughts," said Daniel Wolf, a New York-based M&A lawyer
with Kirkland & Ellis LLP. "But overall, the availability of
low-cost debt financing will be the bigger driver."
Bankers also remain sanguine.
"Whilst the recent market volatility may impact short-term
decision making, most participants in the M&A market take a
long-term view," said Francois-Xavier de Mallmann, global co-head
of consumer, retail and health-care investment banking at Goldman
Sachs Group Inc. in London.
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(END) Dow Jones Newswires
August 23, 2015 20:04 ET (00:04 GMT)
Copyright (c) 2015 Dow Jones & Company, Inc.
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