2018 Is The Year of M&A. Here is How You Can Trade on Them – Introduction
This year, while the financial markets have been rattled by the Trump tactics on trade, one thing has been great; Mergers and Acquisitions (M&A). This year, new deals are being announced as companies start to enjoy from the low corporate tax environment. In addition, companies are doing the M&A as they try to search for growth.
For example, recently, it was announced that Walmart is in talks to purchase health insurance company called Humana for more than $67 billion. It was also announced that Disney would buy assets of 20th Century Fox in a deal valued at more than $66 billion. Cigna announced that it would purchase Express Scripts for more than $38 billion while Broadcom continued the pursuit of Qualcomm in a deal worth more than $120 billion.
So, as a trader, how do you benefit from such deals?
To understand how, you need to understand how the M&A process works. First a company sees another company that would form a great match and approaches it. In most cases, this process is usually on friendly terms. As such, the company being bought can accept to be acquired or it can refuse. In the case of Broadcom and Qualcomm, the latter refused to be bought.
To get the deal done, Broadcom decided to nominate five members to the board of Qualcomm. This was intended for them to play an important role in the acquisition process. They were to nominate the board members during the company’s annual general meeting. Sadly, before they completed all this, the U.S authorities placed obstacles and the deal fell apart.
The other option for an M&A is where a company approaches other companies to be acquired. In most cases, this is a company that is in financial trouble and is seeking alternatives to get out of the problems. A good example of this is the radio company, Pandora. After being in trouble for long, it approached the bigger company, Sirius XM. While Sirius never bought Pandora, they invested in the company.
Now, after the offer has been made, it needs to go through a thorough review by the authorities. They do this with the aim of protecting the customers. For example, recent reports show that customers have been disenfranchised by a deal made 8 years ago when events promoter, Live Nation acquired online ticketing company, Ticket Monster.
As a trader, one way to benefit is to always be the first person to know when new deals are announced. By this, you can take advantage of what is known as merger arbitrage. This is where you buy the stocks of the company being acquired and short the acquirer for obvious reasons. After this, you can analyze the companies and figure out whether authorities will accept the deal. For example, when AT&T announced that it would buy Time Warner Cable. Trump hates TWC, which owns CNN, a media company he does not like. Therefore, when he won, most traders exited their arbitrage positions because they knew that Trump would challenge the acquisition.