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Time to take stock

Global M&A volumes are heading back up to levels not seen since 2000. This should give investors pause for thought: 2000 was, after all, a year of excess. Although the market is very different today, some things never change. Peter Koh reports.

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.

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