Strategy
What is a merger
arbitrage strategy?
A merger arbitrage strategy, also known as risk arbitrage, aims to generate consistent, positive returns with low volatility and low correlation to both equity and bond markets. The strategy focuses on uncovering opportunities in announced, legally binding mergers or acquisitions. It is designed to generate returns captured from the discount between the market price and the ‘deal’ price for companies to be acquired.
Why invest in our merger arbitrage
strategy?
- Diversification. Adding a unique, event-driven equity strategy that seeks low correlation to the overall equity market can be a source of alpha and can improve the overall diversification of a portfolio.
- Risk mitigation. A merger arbitrage strategy is designed to ease equity market volatility and reduce the impacts of portfolio declines because it capitalizes on isolated events and spreads out risk across a portfolio.
How does our merger arbitrage
strategy work?
Merger arbitrage, also known as risk arbitrage, is an investment strategy designed to benefit from the successful completion of an announced merger and acquisition (M&A) deal. It aims to capitalize on pricing inefficiencies caused by an event, such as the takeover of one company by another, and capture a profitable spread between a company’s current trading price and the target price when the deal closes.
OUR PROCESS
01
Determine rate of return – bid value, spread and approximate time to close.
02
Determine risk/ return – downside risk, probability of deal success, other factors.
03
If we estimate high likelihood of success, and the return is attractive, we execute.
This is an example of the all-cash acquisition of Cerner (blue) by Oracle with a comparison to the U.S. stock market (purple) over the same time period. A profit can be generated from the closing of the spread between the market price and deal price, which occurred independently of the market’s movement.
INVESTMENT RATIONALE
The acquisition of Cerner was a strategic and complementary deal for Oracle, a large, well-capitalized database and cloud service provider. The deal was synergistic for Oracle because it expanded its cloud and data service presence deeper into healthcare applications, given Cerner is the largest provider of electronic health records. The perceived probability of deal success was very high, with low anti-trust issues due to lack of overlaps, creating an attractive risk-reward potential.
RESULTS
The acquisition of Cerner was a strategic and complementary deal for Oracle, a large, well-capitalized database and cloud service provider. The deal was synergistic for Oracle because it expanded its cloud and data service presence deeper into healthcare applications, given Cerner is the largest provider of electronic health records. The perceived probability of deal success was very high, with low anti-trust issues due to lack of overlaps, creating an attractive risk-reward potential.
Source: Bloomberg, Company Filings. Date: 2021/11/1 to 2022-6/7
Who is our market neutral strategy for?
Our merger arbitrage strategy may be suitable for investors who:
- Seek consistent positive returns with lower volatility to the overall equity market.
- Desire diversification using a strategy with low correlation to both equity and bond markets.
- Seek to reduce interest rate risk, as returns tend to rise with an increase in interest rates.
- Wish to improve their tax efficiency, as merger arbitrage returns are primarily capital gains.
What merger arbitrage investment products does Picton Mahoney offer?
Alternative Investment Solutions are available as mutual funds, liquid alternative funds and hedge funds. Our suite of Fortified Mutual Funds, Fortified Alternative Funds and Authentic Hedge® Funds give investors more choice and ease of access to alternative strategies, adding an alternative source of returns to fortify a portfolio. Our goal, for over 18 years, through different market cycles and investing environments, has been to improve the quality of returns by offering alternative investment solutions.
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This information has been provided as a general source of information, is subject to change without notification and should not be construed as investment advice. This material should not be relied upon for any investment decision and is not a recommendation, solicitation or offering of any security in any jurisdiction. The information contained in this material has been obtained from sources believed reliable, however, the accuracy and/or completeness of the information is not guaranteed by Picton Mahoney Asset Management (PMAM), nor does PMAM assume any responsibility or liability whatsoever. All investments involve risk and may lose value. This information is not intended to provide financial, investment, tax, legal or accounting advice specific to any person, and should not be relied upon in that regard. Tax, investment and all other decisions should be made, as appropriate, only with guidance from a qualified professional.
There is no guarantee that a hedging strategy will be effective or achieve its intended effect. The use of derivatives or short selling carries several risks which may restrict a strategy in realizing its profits, limiting its losses, or, which cause a strategy to realize or magnify losses. There may be additional costs and expenses associated with the use of derivatives and short selling in a hedging strategy.
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