Corporate America has been putting its cash hoard to good use, expanding and acquiring businesses last year, and could continue to fuel merger and acquisition activity, along with related exchange traded funds, this year as well.
Recently, Shire (NasdaqGS: SHPG) announced a buyout of NPS Pharma (NasdaqGS: NPSP). Roche, Johnson & Johnson (NYSE: JNJ) and Biogen (NasdaqGS; BIIB) also planned deals. Additionally, Zillow (NasdaqGS: Z) will likely merge with Trulia (NYSE: TRLA), reports Aparna Narayanan for Investor’s Business Daily.
The increased M&A activity could help boost related ETFs like the Index IQ Merger Arbitrage ETF (NYSEArca: MNA), Credit Suisse Merger Arbitrage Index ETN (NYSEArca: CSMA) and ProShares Merger Arbitrage ETF (NYSEArca: MRGR). For instance, some investors have already positioned ahead of the stronger M&A activity, with MNA seeing assets jump 227% over the past year to $83.2 million. [ETFs to Capture Increased M&A Activity]
Michael Schwerdtfeger, managing director at Chapman Associates, points out that robust corporate balance sheets, historically low interest rates and private equity buyers fueled M&A activity in 2014.
“Those dynamics are still in place,” Schwerdtfeger said in the article.
Additionally, the years of low growth and high unemployment helped instigate entrepreneurship.
“It creates a good environment for M&A now,” Audra Lalley, managing director at Miracle Mile Advisors, said in the article. “While small companies are doing well, large companies are interested in acquiring them.”
The M&A ETFs provide investors with a diversified approach to a group of takeover targets. The ETFs employ a type of alternative, “directional hedge fund strategy” clled merger arbitrage. Specifically, the funds capture the spread or difference between a stock’s trading price before a deal is announced and its eventual takeover price.
“The spread between these two prices typically exists due to the uncertainty that the announced merger or acquisition will close and, if it closes, that such merger or acquisition will be at the initially proposed economic terms,” according to Credit Suisse.
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Max Chen contributed to this article.