Monday, May 10, 2010
One of the aspects of merger arbitrage investing that we find appealing is how you have to be a generalist. Deals happen in all industries, and arbs are not precluded from following a company because of the nature of its business. Indeed, the ingress and egress of names under our purview requires proficiency in a broad range of subjects. In the last few weeks we’ve seen deals involving Qwest Communications, Interactive Data, Continental Airlines, Dollar Thrifty Automotive, inVentive Health, CyberSource, WuXi Pharmatech, Stanley Inc, and Palm, among others. As far as closings, investors can no longer follow BJ Services, Switch & Data Facilities, Terra Industries, 3Com, and Facet Biotech.
You can find an event analyst immersed in hydraulic fracturing one day, studying the likelihood of any possible legislation that could come about (and potentially derail the XTO Energy – Exxon Mobil merger). The next day the same analyst could evaluate the competitive impact of combining an internet payment gateway provider with a payment network (for antitrust issues in the CyberSource – Visa deal).
A recent trend we’ve noticed is that financial sponsors (private equity) have been more active lately. Thomas H. Lee Partners announced the buyout of inventive Health on May 6 for $1.1 billion. Warburg Pincus and Silver Lake reached a $3.4 billion deal for Interactive Data on May 4. It is being said that Blackstone, THL, and TPG are in talks to acquire Fidelity National Information Services for around $13 billion. That would be the largest LBO in nearly three years. A merger revival appears to be in the making. Even the inimitable Jimmy Lee of JP Morgan sees a deal boom on the horizon.
We are also watching a few companies who are “reviewing strategic alternatives” which very often leads to a transaction. We are welcoming the increased activity on our desk. Hopefully spreads will widen to attractive levels in the near future, since the risk-reward for many situations does not warrant a portfolio position. Given how merger arbitrage spreads have collapsed over the past 5-10 years, we hope that a more healthy supply of deals will soak up capital more effectively and possibly give us some "fat pitches" to generate sizeable risk adjusted returns.