Despite the fact the markets have been trending downward over the last few weeks, companies seem to be partying like it's 1999. A new wave of high-profile IPOs has hit the markets, M&A deals have skyrocketed and new corporate bond issues have increased. Firms flushed with cash have resumed these sorts of activities in a major way in the current low-interest-rate environment as a means to find growth. With the markets continuing to ebb and flow, individual retail investors could learn a lesson from these strategies. Profiting from the deal boom could be just what investors are looking for.
TUTORIAL: Economic Indicators To Know
Even with the overall markets falling, the pace of deals has continued to quicken. Companies increased their spending on acquisitions by 20% during the first quarter of 2011 versus the first quarter of 2010. When compared to the dollar volume low in 2009, deals are up 40%. Overall, Dealogic estimates that global M&A totaled $1,560 billion during the first half of the year. This is a 25% increase versus last rear. That number is set to increase. According to a survey from Thomson Reuters and consulting firm Freeman, 2011 could see more than $3,000 billion in transactions on around the globe.
At the end of the first quarter, companies were sitting on $1,900 billion in cash and stocks within the S&P 500 are currently trading at a forward P/E of about 13. With stocks still historically cheap and so much cash lining the pockets of businesses, mergers and acquisition are an ideal way to deploy that cash. In addition, buying growth and sales are a lot cheaper than creating it from scratch. For example Nestle (OTCBB:NSRGY) recently decided to buy a 60% stake in Chinese snack and candy maker Hsu Fu Chi International for $1.7 billion. It's easier to crack the vital Chinese market from the inside, rather than pay for new marketing and grow its own brands.
Companies raising capital via initial public offerings have also exploded in recent months. IPO consultants Renaissance Capital, reports that about 100 different firms will seek some $18.5 billion over the next few months. However, so far firms have already raised nearly $24 billion and the average IPO stock has returned 12.4%. With big name tech corporations like social media firms Facebook and Twitter, and online games producer Zynga getting ready to release IPOs, the sector has the potential to remain robust for a while.
How to Play the Booms
For investors, these recent trends in M&A and IPO activity could be great plays over the next few months. These sorts of market neutral strategies could be exactly what a portfolio needs as the market continues it's up and down patterns. Here's how to play them.
Capturing the difference between the deal offer price and the current stock price, The Credit Suisse Merger Arbitrage Liquid Index ETN (NYSE:CSMA) allows investors to play merger mania. The underlying index is rebalanced every five days, rather than monthly or quarterly, allowing for the fund to capture these event-driven gains. Expenses run at a relatively cheap 0.55% and currently the fund tracks 33 holdings including Lubrizol (NYSE:LZ) and shoemaker Timberland (NYSE:TBL). The IQ ARB Merger Arbitrage ETF (NYSE:MNA) follows a somewhat similar strategy.
In addition, the commodities sector has seen the bulk of merger activity due to large firm's lack of organic growth. The Jefferies TR/J CRB Wildcatters E&P (NYSE:WCAT) and Global X Gold Explorers ETF (NYSE:GLDX) follow the junior producers of these resources that have been targets.
Finally, the First Trust US IPO Index (NYSE:FPX) allows investors to profit from rising IPO prices. Eligible companies are added to the index on the sixth trading day after an IPO launch and remains in the index for 1,000 days. For those investors who want to relive the go-go days of the dot com era and bet on Internet IPOs like Pandora (NYSE:P) and Ancestry.com (Nasdaq:ACOM), the ETRACS Internet IPO ETN (Nasdaq:EIPO) is for you.
The Bottom Line
Despite the recent headways in the markets, IPO and M&A activity is way up. For investors, adding a dose of these strategies to a portfolio could be a great play for the rest of the year. The previous ETFs are a great way to participate in these markets and add some alternative beta to a portfolio. (For additional reading, check out Summer's Hottest Upcoming IPOs.)
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