Abstract

M&A activity and the returns of targets and acquirers may provide information about both the companies involved and the overall market conditions. This paper shows evidence that a number of M&A related measurements, such as the number of live deals or the beta of a portfolio of cash targets, may provide predictive information about future returns of the S&P index. It also describes portfolios of M&A targets or acquirers constructed while taking into account risk management constraints, including concentration risk, amount invested, or leverage, as well as deal characteristics and potential competing bids or term improvements, and explores how the performance of these portfolios changes as these constraints are modified.

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1. Introduction

Mergers and Acquisitions (M&A) are among the main events in the lifetime of a company, making them also a key focus of research. M&A activity as well as the stock returns of targets and acquirers over varying timeframes may provide information about the behavior, investments, or beliefs of vari- ous economic agents, from the managers and shareholders of the companies involved (or not) in such deals, to the (risk) arbitrageurs that may take positions on targets and acquirers for example when deals are announced.

In this paper we study portfolios of M&A targets and acquirers with the overarching goal to explore whether they provide information about the over- all market conditions. A key motivation of the paper is that M&A activity, as well as the returns and overall behavior of related portfolios possibly held by risk arbitrageurs, may provide a window to the behavior of key economic agents which may be informative for the overall market, hence also useful for other agents including regulators and policy makers in addition to managers and investors.

To this purpose, we study M&A deals from two different but complemen- tary perspectives. First, we consider the volume of M&A activity over time and show evidence that the flow of live M&A deals, hence also the oppor- tunities available to risk arbitrageurs, predicts overall market returns, such as the returns of the S&P index, in the 20 years period studied. While pre- vious work has focused on the contemporaneous relation of market returns and M&A activity (Harford, 1999, 2005; Andrade, Mitchell, and Stafford, 2001; Betton, Eckbo, and Thorburn, 2008; Dong, Hirshleifer, Richardson, and Teoh, 2006; Jovanovic and Rousseau, 2002; Maskimovic, Phillips, and Yang, 2013; Rhodes-Kropf and Viswanathan, 2004; Rhodes-Kropf, Robin- son, and Viswanathan, 2005; Shleifer and Vishny, 2003) showing that mar- ket highs relate to high M&A activity, we focus on a non-contemporaneous relation between M&A activity and future market returns. The literature has mainly focused on what the market conditions may imply about M&A…