M&A May Rise…Next Year

Terry Flanagan

Buy side market observer predicts more deal volume next year, which may be good news for event driven hedge funds.

It’s been a lukewarm year for mergers and acquisitions.

A late 2010 study from Thomson Reuters and Freeman Consulting Services concluded that the global market for mergers and acquisitions (M&A) would surge 36 percent in 2011 to over $3 trillion.

Yet, since the first quarter of 2011, M&A activity has dipped.

Yet, global M&A activity in the third quarter dropped by more than 12 percent compared to the same period last year, reported Bloomberg. In the third quarter through September 23, there have been 9,381 deals announced globally with a dollar value of $573.3 billion, according to Dealogic, a provider of global investment banking analysis.

“The transaction activity in the hedge fund industry, as indicated by both the number and size of completed transactions, can best be described as sluggish,” said Karl D’Cunha, senior managing director and head of Madison Street Capital’s asset management industry focus group.

“However, if last year’s past results has any predictive value, we can expect a surge in activity in the fourth quarter that will likely spill over into the first quarter of 2012.”

D’Cunha is very optimistic about next year’s M&A prospects.

“Depending on the particular needs that specific types of strategic buyers are trying to fill, there will be continued demand for acquisitions,” he said. “Given current economic conditions and what we are hearing on the Street, there will be increased demand for credit managers, across many styles, certain types of long/short equities, and potentially convertible arbitrage.”

Among hedge fund strategies, event-driven managers are, arguably at the “beck and call” of M&A activity due to their plays on corporate events, and general long bias on the direction of the equity market.

Returns have been “across the board,” for event –driven managers, according to D’Cunha.

“Given the variation in styles, as some funds are more sector focus while others focus on certain market cap ranges, returns have been across the board,” he said. “Since demand is somewhat driven by the underlying manager’s performance, I would suspect if there is a slow-down on larger cap M&A activity, that would be a strong headwind against certain event driven firms.”

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