Anomalous Deal Return Capture: A Cross-Sectional Study of Three Hypothetical Global Merger Risk Arbitrage Portfolios 2000-2016

Abstract

This paper examines the annual risks and returns of three disparate, hypothetical merger arbitrage portfolio strategies as an attempt to capture alpha from an in-sample study of 793 global M&A transactions covering the January 2000 thru December 2016 time period. Previously written and undoubtedly the most prominent literature into M&A and merger arbitrage [Schleifer & Vishny ‘97], [Mitchell & Pulvino ‘01] and [Baker & Savasoglu ‘02] focus on the limits of pure arbitrage the creation of such from noise/shock trading and the risk & return characteristics of a merger arbitrage trading strategy respectively. This paper by no means covers the universe of the arbitrage literature and touches only a fraction of arbitrage research – yet, this is the only paper I know of examining global merger arbitrage transactions and the construct of a long-only merger arbitrage strategy encompassing both US as well as non-US merger arbitrage deals and bench-marking the portfolios' risk and returns series against a non-U.S. benchmark. This study demonstrates that alpha can be added by purchasing target companies as part of a long-only global merger arbitrage strategy. Furthermore, above benchmark returns can be earned by also buying the targets of terminated deals. This study is less conclusive on the incremental value of purchasing the acquiring company's shares following a successful or terminated deal where stock is part of the deal consideration.