3 Ways to Play the M&A Wave

by Tom Taulli | June 12, 2013 12:21 pm

Deal185 3 Ways to Play the M&A Wave[1]Google (GOOG[2]) bought Waze. AstraZeneca (AZN[3]) acquired Pearl Therapeutics. IHS (IHS[4]) snapped up Carfax operator R.L. Polk.

That’s right: At least for this week, Merger Monday was back[5].

Granted, we might just be seeing a false restart of M&A activity after about a month of rest — and that would be especially likely if the market’s recent volatility sticks around for a while. Still, there are some drivers that could be reviving Wall Street wheeling and dealing: Corporate America is flush with cash and is desperately seeking ways to boost growth, and the U.S. economy appears to be on firmer footing, which is conducive to dealmaking.

Of course, while investors’ first thought might be to try to pick and choose companies they think might get bought out, a couple other options might be more appealing.

For instance, there are merger funds, which typically use a strategy known as arbitrage, where a portfolio manager trades shares in both buyer and buyout target — a clever way to profit from the current stock price and the bid price of the target. While some deals do fall apart, it’s a rare occurrence, making this strategy fairly low-risk. But fair warning: You trade potential for big pops in exchange for this security.

With that in mind, here are three ways to play M&A right now:

Merger Fund

MergerFund185 3 Ways to Play the M&A Wave[6]The Merger Fund (MERFX[7]), at $4.3 billion in assets under management, is one of the biggest (and most recognizable) names in the space.

MERFX has a steady track record, with a 15-year average annual return of about 5%, with an understandably high turnover ratio (currently 240%) weighing a bit on that performance. The key to its success? For one, top-notch managers including Roy Behren and Michael Shannon — both have more than two decades of experience with investing in buyout targets, and they have been at the Merger Fund’s helm since 2007.

The fund’s focus primarily is on larger, U.S.-based deals. Some of its most recent targets have been T-Mobile’s (TMUS[8]) purchase of MetroPCS and Berkshire Hathaway’s (BRK.B[9]) acquisition of Heinz.

Merger Fund has earned a four-star rating from Morningstar. It has no sales charge, expenses are a reasonable 1.27%, and it requires a minimum investment of just $2,000.

IQ Merger Arbitrage ETF

IndexIQ185 3 Ways to Play the M&A Wave[10]If you want to play M&A via an exchange-traded fund, consider the IQ Merger Arbitrage ETF (MNA[11]). MNA is based on the IQ Merger Arbitrage Index, which involves a sophisticated computer model that tracks opportunities across the world, including developed Europe and emerging Asia.

The strategy has produced solid if unspectacular results, including a 4.7% gain year-to-date. Some of MNA’s current holdings include Dell (DELL[12]), Sprint (S[13]) and BMC Software (BMC[14]).

MNA is a smallish fund, boasting only $14 million in assets under management, but it’s also decently priced for what it does, charging just 0.76% in expenses.

As a note, MNA’s parent company, IndexIQ, is solely focused on providing ETF products for alternative investment categories. I recently interviewed CEO Adam Patti[15], who discussed how he and IndexIQ are trying to bring sophisticated strategies to the masses.

Blackstone Group

Blackstone185 3 Ways to Play the M&A Wave[16]OK, so Blackstone Group (BX[17]) isn’t a mutual fund or ETF, but as a private equity firm, it’s still a great way to get into the M&A game.

Private equity firms purchase companies — usually ones with lots of debt — then make money by selling them again or putting them back on the public market via initial offerings. So, for those investors who want a higher return than arbitrage, a private equity firm could be a preferable alternative.

Blackstone is the leading player in its space with a whopping $218 billion in assets under management. In the past two years alone, it has raised $96 billion. More importantly, BX has been generating nice returns from its portfolio, especially amid a nice comeback for the IPO market. Some of Blackstone’s more recent offerings include PBF Energy (PBF[18]), SeaWorld (SEAS[19]) and Pinnacle Foods (PF[20]).

That said, Blackstone also has other sources of income, including hedge fund management and real estate investment.

While BX shares are a bit frothy at 21 times trailing 12-month earnings, it does offer a sweet dividend currently yielding 4.4%.

So, if the M&A market does rebound — and the IPO market continues its winning ways — BX could be a fantastic double-threat.

Tom Taulli runs the InvestorPlace blog IPO Playbook[21]. He is also the author of High-Profit IPO Strategies[22]All About Commodities[23] and All About Short Selling[24]. Follow him on Twitter at @ttaulli[25]. As of this writing, he did not hold a position in any of the aforementioned securities.

Endnotes:
  1. [Image]: http://investorplace.com/wp-content/uploads/2013/06/Deal185.jpg
  2. GOOG: http://studio-5.financialcontent.com/investplace/quote?Symbol=GOOG
  3. AZN: http://studio-5.financialcontent.com/investplace/quote?Symbol=AZN
  4. IHS: http://studio-5.financialcontent.com/investplace/quote?Symbol=IHS
  5. Merger Monday was back: http://investorplace.com/2013/06/merger-monday-whos-the-big-winner/
  6. [Image]: http://investorplace.com/wp-content/uploads/2013/06/MergerFund185.jpg
  7. MERFX: http://studio-5.financialcontent.com/investplace/quote?Symbol=MERFX
  8. TMUS: http://studio-5.financialcontent.com/investplace/quote?Symbol=TMUS
  9. BRK.B: http://studio-5.financialcontent.com/investplace/quote?Symbol=BRK-A
  10. [Image]: http://investorplace.com/wp-content/uploads/2013/06/IndexIQ185.jpg
  11. MNA: http://studio-5.financialcontent.com/investplace/quote?Symbol=MNA
  12. DELL: http://studio-5.financialcontent.com/investplace/quote?Symbol=DELL
  13. S: http://studio-5.financialcontent.com/investplace/quote?Symbol=S
  14. BMC: http://studio-5.financialcontent.com/investplace/quote?Symbol=BMC
  15. interviewed CEO Adam Patti: http://investorplace.com/2013/03/how-to-get-hedge-fund-exposure-without-the-high-expenses/
  16. [Image]: http://investorplace.com/wp-content/uploads/2013/06/Blackstone185.jpg
  17. BX: http://studio-5.financialcontent.com/investplace/quote?Symbol=BX
  18. PBF: http://studio-5.financialcontent.com/investplace/quote?Symbol=PBF
  19. SEAS: http://studio-5.financialcontent.com/investplace/quote?Symbol=SEAS
  20. PF: http://studio-5.financialcontent.com/investplace/quote?Symbol=PF
  21. IPO Playbook: http://investorplace.com/ipo-playbook/
  22. High-Profit IPO Strategies: http://goo.gl/TXQsz
  23. All About Commodities: http://goo.gl/FfP8R
  24. All About Short Selling: http://goo.gl/t5Jzb
  25. @ttaulli: https://twitter.com/ttaulli

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