The coronavirus pandemic has virtually eliminated shaking hands. Its economic impact now has investors doubting whether many companies which shook on mergers and acquisitions will see them completed.
Traders and fund managers say the spread between agreed deal prices and subsequent trading in the stock of the acquisition targets is the widest they have come across.
“I have been doing this for 25 years, and I have never seen panic like this coming out of merger arbitrage spreads,” said Roy Behren, managing member of Westchester Capital Management, which has US$4.1 billion in assets under management, most of it invested in merger arbitrage.
Shares of acquisition targets typically trade at a small discount to the deal price in the period between the announcement of a transaction and its completion, pricing in risks such as the possibility that regulators will block it or that the financing for it will fall through.
However, deal price spreads widened dramatically this month, even though no deal has collapsed.
This is because investors fretted that the rout in the markets and the expected economic downturn will make it more likely that acquirers will try to walk away from deals, or that they will lose the financing to complete them.
Behren said the median annualized return in the deal price spreads he tracks has jumped from single percentage points to 25%.
Shares of US jewelry chain Tiffany & Co ended trading on Tuesday, March 17, at a 14% discount to the US$135 per share all-cash deal price at which it agreed to sell itself to France’s LVMH in November. The stock was hovering at a 1% discount from the time of the deal announcement till earlier this month, offering one of the tighter spreads in merger arbitrage.
Behren said the blow-out of the spread reflected investor fears that LVMH will get cold feet about the deal, as the coronavirus pandemic weighs on consumer spending. Tiffany said on Tuesday it would temporarily close several stores, including its Fifth Avenue flagship store in New York, in an effort to contain the spread of coronavirus.
Still, Behren said he believed the spread offered a buying opportunity, because the chances of LVMH making a U-turn on the US$16.2 billion deal remained low. LVMH and Tiffany did not immediately respond to requests for comment on the anxiety of some investors over their deal.
Other deals whose spreads soared this month include US drugmaker AbbVie’s US$63 billion acquisition of Botox-maker Allergan, private equity firm Apollo Global Management’s US$6 billion leveraged buyout of US information technology equipment Tch Data Corp, and buyout firm Blackstone Group’s US$6.3 billion takeover of US energy pipeline operator Tallgrass Energy.
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