Merger Arbitrage Investors Suffer Significant Losses In June

Merger arbitrage funds lost 1.38 percent so far in June, according to Financial Times. Merger arbitrage strategy invests in acquired companies after an acquisition announcement and shorts the acquiring companies to hedge the market risk. The strategy had been very profitable during the 80s and 90s but recently the margins shrunk due to competition in this space. The strategy carries a small amount of market risk; deals fall apart and result in big losses for merger arbitrage investors during though economic times and sharp market sell-offs. One of the best pieces on merger arbitrage is written by Joel Greenblatt in You Can Be A Stock Market Genius.

FT reports that some potential deals are shelved while other deals are moving slower than expected. Here is an excerpt:

Last week, Avis Budget’s $1bn agreement to buy Avis Europe sent shares in US rival Dollar Thrifty tumbling almost 10 per cent as hopes of a bidding war between the car hire operator and Hertz evaporated.

Nasdaq last month halted its pursuit of NYSE Euronext, after US regulators threatened to block a deal. Canadian miner Lundin abandoned plans to sell itself after bids failed to impress the board.

“The last six weeks have been very difficult,” said one merger arbitrage investor. “There is definitely a de-risking going on … People get gun-shy.”

In Europe, the UK Takeover Panel last month denied an appeal from Kalahari Minerals to let China Guangdong Nuclear Power lower its indicative price in talks with the Aim-listed group. Other deals, including News Corp’s bid for BSkyB, are tied up awaiting government approvals.