Source: FactSet, Standard & Poor’s, DuPont. The DuPont-Rogers Deal: Crashing in Slow Motion Rogers Corporation stock price Between the announcement of the deal in November 2021 and May 2022, the stock traded at an average spread of just 1.75% below the agreed acquisition price of $277 (figure 2). The transaction was expected to close in the first half of the year, following further non-U.S. By November 5, the stock was included in the closely followed S&P Merger Arbitrage Index, with a weight of 3.75%.īy the end of January 2022, Rogers’ shareholders had approved the deal and U.S. Rogers stock soared by 30% when the deal was announced, hitting a November 2 close of $269.90. The acquisition was part of a long-running reorganization of DuPont’s business to focus on higher-margin, faster-growing markets. The synergies were clear: Rogers’ leading expertise in electronic and elastomeric materials would enable DuPont’s electronics and industrial business to address growing demand for advanced materials from manufacturers of electric and hybrid vehicles. AntitrustĭuPont, the $34 billion chemicals and materials giant, announced that it had agreed to acquire the stock of Rogers Corporation, a manufacturer of engineered materials, at a price of $277 per share, or approximately $5.2 billion. The story of one of those deals-a notably big one-began on November 2, 2021. It is in this subset of deals where the market’s assessment of reward-for-risk can be most askew, and where active fundamental and technical research can seek to add value. Most announced acquisitions close as planned, but not all of them-and history’s high success rate can cloak the complexity inherent in a subset of announced deals. Past performance is no guarantee of future results.Īs we will go on to discuss below, however, that return stream reflects the efforts of many active merger arbitrage managers to avoid some of the biggest pitfalls in the strategy. Investing entails risks, including possible loss of principal. Indexes are unmanaged and are not available for direct investment. Due to a variety of factors, actual events or market behavior may differ significantly from any views expressed or any historical results. Nothing herein constitutes a prediction or projection of future events or future market behavior. Calendar-year returns to the HFRI Event Driven: Merger Arbitrage Index of investable merger arbitrage hedge fund strategies, 2016 – December 2022. Calendar-Year Returns for Merger Arbitrage Strategies According to HFR data, between January 1990 and November 2022, the HFRI Event Driven: Merger Arbitrage Index of investable merger arbitrage hedge fund strategies realized an annualized return of 7.34% with volatility of 4.3% and correlation with the S&P 500 Index of just 54%, and only two negative calendar years (figure 1). Merger arbitrage has an attractive long-term track record. When a major deal fell through in November, it was a timely reminder to address these questions. But is leaving potential alpha on the table a false economy?Ĭan systemic risks emerge to make naïve diversification less effective? And does the “merger-arb risk premium” really compensate investors for the losses that accompany failed acquisitions? That is a cost-effective way to do merger arbitrage, for sure. Do the same for all the stocks that are publicly declared acquisition targets and, in theory, you systematically diversify away the idiosyncratic deal-failure risk associated with each acquisition and are left with the merger-risk premium. Buy the target and hedge the position to crystalize the spread to the announced deal price, and as long as the acquisition goes ahead, you earn that spread. The spread between that new market price and the declared acquisition price compensates investors for the risk that the deal fails, theoretically. When one company announces an agreement to acquire another, the stock price of the target company tends to jump close to, but not quite as high as, the declared acquisition price. Merger arbitrage has been an important case study. But over the years, academics and practitioners haveĪrgued that many hedge fund strategies are based on a risk premium, or “beta,” that can be The hedge fund world is generally associated with “alpha”-idiosyncratic returns that appearĭisproportionate to any risk being taken. Why we believe a recent failed acquisition is a reminder to think twice about systematic approaches to merger arbitrage.
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