How the M&A activity rise can help boost your investment returns

2nd October 2013

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Investment experts are gearing up for a boost in merger & acquisition activity, which should in turn drive up investor returns writes Philip Scott.

After a prolonged period of lacklustre activity, fund managers are now seeing a change in sentiment amongst businesses as confidence returns and M&A activity is set for a strong run.

According to research from fund broker Hargreaves Lansdown, of all deals done across all the major international equity markets from 2001 to 2013, it was calculated that shareholders received an average premium of 20.26% on the pre-announcement price.

The premium on shares subject to M&A activity has varied hugely over the past 12 years with the average premium falling to 12% in the second quarter of 2004 and rising to a peak of 32% in the first quarter of this year. However, over the longer term the average premium remains consistent at around 20%.

IPO activity in London has enjoyed something of a renaissance already 2013 with the stock market debuts for some high-profile firms including estate agency Foxtons and soon Royal Mail enters the plc universe.

According to a report in the Financial Times this week, in 2012 Aim hosted only 71 new share issues, compared with 462 in 2006. Just recently, broker Panmure Gordon bolstered the proof of a revival in brokers’ fortunes, reporting that “corporate finance and other income” increased by 44% year-on-year in the first half of 2013, to £9.5m.

Adrian Lowcock, senior investment manager, at Hargreaves Lansdown says: “M&A activity has been subdued since the financial crisis. However, there are signs this is changing.  Fund managers we have spoken to are seeing a change in sentiment amongst businesses as confidence returns and M&A activity is set for a strong 2013.

How to play the M&A activity rise

The potential to benefit from an extra return on your investment will appeal to investors and a return of M&A activity is to be welcomed. But trying to pick the next takeover target is not easy and this is where a fund manager can help and certain managers are more likely to benefit than others.

Lowcock says: “Those who invest in turnaround situations and managers who invest in undervalued businesses are most likely to benefit from an increase in takeovers.”

This is a theme investors can access as there are a number of funds and investment strategies, which benefit from M&A activity. Lowcock cites two funds in particular – M&G Recovery and Old Mutual UK Alpha.

M&G Recovery

Lowcock says: “M&A activity has historically been beneficial for the fund.  Given the focus on undervalued recovery companies the fund is well positioned to benefit from an increase in M&A activity. However investors should only consider this fund for the medium to longer term because the manager is typically investing in companies for around 5 to 7 year.”

Old Mutual UK Alpha

Lowcock says: “This fund has been a beneficiary of M&A over the last 10 years, with an average of 8% of the portfolio being subject to a takeover or merger, according to research by Hargreaves Lansdown.  Ashton Bradbury, Head of Equities at Old Mutual, believes that there will be more shareholder-friendly action over the next 12 months, be it good dividend growth, special dividends or M&A.”

 

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