Source: Finance Association

Author: Shi Zheng Cheng

Faced with the erratic policy path of the Federal Reserve and the “black swan” incident that pops up from time to time, the US stock index has been swirling around at about half a year in a trance. For investors who are worried that buying stocks won't make money and might lose money by buying US Treasury bonds, Wall Street's “old debt lord” Bill Gross publicly offered his advice:Why don't you try mergers and acquisitions arbitrage.

The so-called merger and acquisition arbitrage transaction is after the merger and acquisition transaction has been made public,Find the difference between the stock price and the target price of the M&A. Due to increasingly strict anti-monopoly scrutiny around the world in recent years, this part of the price difference includes the market's pricing for “failed mergers and acquisitions.”

Here's an example that investors are all very familiar with,$Microsoft (MSFT.US)$Give it in early 2022$Activision Blizzard (ATVI.US)$The initial purchase price was $95 per share, but due to unclear regulatory attitudes in various countries, Activision Blizzard's stock price has been hovering around $70 for a long time in the past two yearsIt wasn't until the recent relaxation of British regulation that the stock price settled towards 95 US dollars.

Gross explained that after the US Federal Trade Commission lost the lawsuit and the EU passed the review, Activision Blizzard's deal became very attractive because European and American regulatory trends transferred pressure to change positions to British regulation.

In addition to Activision Blizzard,The “great deal” Bill Gross is optimistic about also includes the acquisition of Coach's parent company$Capri Holdings (CPRI.US)$,$Pfizer (PFE.US)$takeovers$Seagen (SGEN.US)$Such a well-known merger and acquisition.

Gross said that using Capri as an example, the company's closing price on Tuesday was $51.15, which is close to 10% off the $57 acquisition price. In his opinion, unlike tech giants, the luxury goods industry is unlikely to be subject to strict scrutiny, so it is highly likely that this deal will be completed within the next 6 to 9 months, with a corresponding annualized yield of 14%.

“The Old Debt King” exclaimed,In the era of anti-monopoly, mergers, acquisitions, and arbitrage are becoming more and more attractive. Even the most logical mergers and acquisitions that have nothing to do with monopoly will result in larger price differences.

It should be emphasized that any trade is risky, and arbitrage trading is no exception. In addition to the factors that cause mergers and acquisitions to fail, hedge funds that adopt this strategy often come with their own leverage, which amplifies profits while also increasing the risk of loss.

Take this year's very famous transaction of AMC Entertainment to convert preferred shares into common shares as an example.Many institutional investors have used the strategy of buying cheaper preferred shares while shorting AMC common stock. Since AMC's market capitalization is not high in the first place, compounded by a series of twists and turns during the transaction process, S3 Partners, a well-known data agency, estimates that for arbitrage investors who started this transaction in different months,The final net return is between -260% and 150%.

Of course, the fundamental reason for engaging in arbitrage transactions at such great expense is that Gross is not optimistic about current US stocks and US debt.

In the outlook forecast announced last week,Gross believes that the current valuation of the US stock market is too expensive compared to the sudden rise in interest rates, and furthermore, he doesn't think the Fed can cut interest rates drastically in a context where inflation is still high.

edit/new