Traders can profit from the flurry of mega-deals

WILL 2013 be the year the bulge bracket banks have been waiting for? Since 2008, headline-grabbing mergers and acquisitions (M&A) deals have been few and far between. But the flurry of activity at the start of February, the most since 2005, suggests things may be about to change.

Last week, Warren Buffett’s Berkshire Hathaway teamed up with 3G Capital, the private equity firm backed by Brazil’s richest man Jorge Paulo Lemann, in a move to take ketchup maker Heinz private in a $23bn (£14.9bn) cash deal. This followed Dell chief executive Michael Dell’s plans to clinch a $24.4bn deal to take the world’s third largest PC manufacturer private. Add last Thursday’s $11bn merger between American Airlines and US Airways, forming the world’s biggest airline, and Liberty Global’s $23.3bn Virgin Media deal, and we’re up to $81.3bn worth of M&A activity in the space of two weeks.


So why is Wall Street M&A activity returning to life? First, thanks to central banks keeping interest rates at artificially low levels, many companies are sitting on cash that yields very little, but have access to cheap debt. We have seen this drive a flurry of overseas M&A activity by Japanese firms, and it seems Wall Street is following suit. But these conditions have been in place since the Fed unleashed the first wave of its quantitative easing programme in November 2008. Why has it taken until now for companies to start looking for acquisition targets?

When the recession first hit, firms aggressively slashed costs and cut their workforce. But many have now run out of fat to trim. With debt so cheap, deals seem the most attractive way of appeasing shareholders looking for growth. And it makes sense to go on the hunt now, while markets are at the bottom of the cycle.


The key to profiting from an M&A deal with spread betting is a pairs trade. This is because you will often see shares in the acquiring company fall, while those of the acquired company shoot up – particularly when there is a suspicion that the predator has paid over the market rate. By going long on the acquired company and short on the predator, you stand to profit from both sides of the deal.

Spread betters should, however, tread carefully when trying to arbitrage M&A deals in this manner. Your two bets leave you twice as exposed to losses should the deal go awry.