Traders in the deals market are heightening their focus on a select group of beaten-down stocks that are drawing interest from activist investors with US mergers-and-acquisitions transactions mired near the lowest levels since early 2020.
(Bloomberg) — Traders in the deals market are heightening their focus on a select group of beaten-down stocks that are drawing interest from activist investors with US mergers-and-acquisitions transactions mired near the lowest levels since early 2020.
That’s the finding of a Bloomberg News survey of 15 event-driven/merger arbitrage desks, analysts, brokers and fund managers, who see insurer American Equity Investment Life Holding Co., chemical distributor Univar Solutions Inc. and software maker Momentive Global Inc. as the top potential targets this quarter.
These companies share a key element: They’re facing pressure from activists calling for strategic reviews and boardroom changes after a dismal stretch of stock performance, intensifying speculation that a transaction will materialize.
This edition of the quarterly survey produced a diminished list of candidates — the fewest over the past year — underscoring that the M&A outlook remains subdued given the risk of recession and with further Federal Reserve interest-rate hikes in the cards. Buyers and lenders are skittish and determining valuations is proving tough — headwinds that poll participants say will likely linger until the second half of 2023.
One metric the merger-arbitrage community monitors is the number of transactions in the works. There are around 40 pending deals involving publicly listed US targets and more than $500 million of equity value, according to Brett Buckley at WallachBeth Capital LLC. This tally has ranged from 50 to 80 candidates when markets are humming along and has dropped toward 20 in recessions, he said.
“It is signaling that the US economy is still downshifting and there is a significant degree of uncertainty in the corporate boardroom right now,” said Buckley, an event-driven strategist. “But we are not yet in a danger zone.”
The anemic state of the market can be seen another way: About $17 billion worth of M&A business has been announced in the US this month, data compiled by Bloomberg show. That’s well off the pace from a year ago, a period that featured the $69 billion blockbuster deal between Microsoft Corp. and Activision Blizzard Inc. That transaction is still in flux.
Activism Drive
American Equity, by far the survey’s top mention, is the focus of a particularly heated activist campaign.
A major stakeholder, Brookfield Asset Management, said last month that it would exercise the right to nominate a board director to help evaluate its buyout offer. That came after American Equity rejected a bid from rival Prosperity Life Insurance Group and Elliott Investment Management.
Meanwhile, the next two targets in the survey have been involved in merger talks that fell apart over the past year. To mergerarb traders, that raises the prospect that they could field new bids and might be more willing to engage.
Poll runner-up Univar Solutions has drawn interest from potential bidders including Apollo Global Management Inc. and Platinum Equity. In November, Univar faced a call from investor Engine Capital to run a full sales process, engaging with a broad array of potential bidders.
The third-place entry, Momentive Global, is on traders’ radar after being targeted by Legion Partners Asset Management.
Potential deals involving shareholder activism were already surging last year as US stocks posted their worst annual loss in more than a decade. The 177 activist campaigns announced worldwide last quarter were the most since 2018, Bloomberg data show.
“The confluence of lower volatility and lower valuations yielded the perfect storm for activism to come roaring back,” said Adam Kommel, a Bloomberg data analyst focusing on activism. Unhappy shareholders, beaten-down valuations and bloated cost structures are producing tantalizing targets for activists, he said.
That helps explain why the survey highlights the software and biotech sectors as likely to dominate this quarter: The sectors that suffered the most during last year’s equities rout are now prime for takeovers, looking attractive to cash-rich strategic buyers and private-equity firms.
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