In the face of the erratic Federal Reserve policy path and the emergence of "black swan" events from time to time, the US stock index has been circling around the same point for less than half a year. For investors who are worried that buying stocks does not make money and buying U.S. Treasury bonds may lose money, Wall Street's "old debt king" Bill Gross publicly offered advice: try merger arbitrage trading.
The so-called merger arbitrage trade is the search for the difference between the share price and the target price of the merger after the deal is made public. Due to the increasingly strict anti-trust review in the world in recent years, this part of the price gap implies the market's pricing of "merger failure".
For example, investors are very familiar with the example, Microsoft in early 2022 to Activision Blizzard opened the acquisition price of 95 US dollars per share, but because of the uncertain attitude of the regulatory countries, so Activision Blizzard in the past two years for a long time in the stock price of more than 70 US dollars, until the recent release of British regulation after the stock price converge towards 95 US dollars.
(Activision Blizzard Daily chart, source: TradingView) Gross interpreted that after the US Federal Trade Commission lost the case and the EU passed the review, the Activision Blizzard deal became very attractive, because the European and American regulatory movement will be the pressure to change the position of the UK regulation.
In addition to Activision Blizzard, Bill Gross's favorite "great deals" include Coach's parent company's acquisition of Capri and Pfizer's acquisition of Seagen.
Capri, for example, closed at $51.15 on Tuesday, nearly 10% below its $57 offer price, Gross said. In his view, the luxury sector, unlike the tech giants, is less likely to face regulatory scrutiny, so there is a good chance that the deal will close in the next six to nine months, representing an annualized yield of 14%.
"Old debt King" lamented that in the era of antitrust merger arbitrage is becoming more attractive, even the most logical mergers and acquisitions that have little to do with monopolies will appear wider spreads.
It should be emphasized that any transaction has risks, and carry trading is no exception. In addition to the failure of mergers and acquisitions, hedge funds using this strategy often have leverage, which amplifies returns and heightens the risk of losses.
In the case of AMC Entertainment's famous conversion of preferred stock into common stock this year, many institutional investors used the strategy of buying the cheaper common stock while shorting AMC common stock. Due to the low market value of AMC and a series of twists and turns in the transaction process, S3 Partners, a well-known data agency, calculates that the final net return for arbitrage investors who started doing the deal in different months is between -260% and 150%.
Of course, the fundamental reason for such a big carry trade is that Gross is not optimistic about the current US stocks and US Treasuries.
In his outlook released last week, Mr. Gross argued that current stock market indexes are too expensive compared with sharply rising interest rates, and he doesn't think the Fed can cut rates aggressively while inflation remains high.