Asset manager GMO believes investors with long-term perspectives should give their attention to merger arbitrage in the present. This despite what current spreads indicate and investor scepticism at the current merger arbitrate market.
The recent collapse of the $30 billion Aon and Willis Towers Watson (WTW) deal prompted as sell-off in the merger arbitrage market, but it’s a big opportunity for long-term investors, according to GMO. Merger arbitrage is the purchase and sale of the stocks of two merging companies at the same time with the goal of creating “riskless” profits.
However, GMO isn’t the only manager with this outlook. George Kellner, founder of Kellner Capital, said he’s more bullish on merger arbitrage than he’s been in decades while Taconic Capital Advisors just raised funds for a new vehicle dedicated to the strategy.
Sam Klar, a portfolio manager at GMO, stated that “Because most merger arbitrage investors are human, they become less confident [if they made a wrong on the Aon-WTW deal]. As they become less confident, they are often in a position where they say, ‘I should go sell some shares in the market. When everyone does that, it can lead to spreads widening a great deal.” Despite this normal reaction, Klar says investors with “fundamental judgements” should see the merger arbitrage space as still presenting substantial investment potential.