ECM bankers thrive on M&A boom
THE CLASSIC M&A arbitrage strategy – you hold the stock of a target company and short that of a bidding company – evolved for good reasons. The target’s share price should always be expected to rise because if you try to buy a company you will have to pay a premium in order to gain control. The bidder’s share price has good reasons to fall: the bidding company takes on the risks of trying to execute a plan to turn one plus one into more than two. This is a challenge that is only theoretically more manageable in real life than in mathematics, a fact borne out by academic studies, which show that the vast majority of M&A deals end in tears and the destruction of value.
What then should we make of the current wave of M&A deals? Investors have greeted many recent deals with uncharacteristic enthusiasm, pushing up the share prices of bidding companies as well as those of their targets. According to JPMorgan, the five-day excess return of European bidders in large deals of more than $5 billion has averaged 2.37% this year.
Investors’ enthusiasm for deals is such, notes Morgan Stanley, that if an investor had bought at the close of the announcement day, they would have found that bidders have actually tended to outperform targets in European M&A deals this year.