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M&A update: Bargains becoming available

Published on 04-03-2024

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Widening gap between mega-cap tech and the rest of the market


Through mid-March Global merger and acquisition (M&A) activity totaled $630 billion, a 42% increase from last year as the sector continues to recover.1 North America is seeing a supportive deal environment with M&A activity up 62% from last year, driven by a spectrum of strategic, private-equity-backed, and cross-border deals. At sector level, M&A is seeing more broad-based activity with the industrial, healthcare, and materials sectors, which saw significant activity in 2023, experiencing a tempering of activity as other sectors are benefitting from a pick-up in deal flow.

Whereas the U.S. energy sector has seen mega merger after mega merger as the largest producers seek to secure reserves in high quality basins like the Permian and unlock synergies through scale, it has been quieter north of the border. With key energy infrastructure projects, including the Trans Mountain Pipeline expansion and LNG Canada expected to be completed this year, Canada could experience a similar merger bonanza as the U.S. with the additional capacity to access new end-markets.

While we are still early in the year, expectations for a rebound in mergers are likely high with Morgan Stanley expecting a 50% jump in M&A activity this year “as corporate confidence recovers, and economic growth holds up.”2 This follows 2023’s decade-low level of M&A activity as rising interest rates, elevated market volatility, and recessionary fears weighed on dealmakers.

North America is predicted to lead global M&A with the healthcare, real estate, consumer staples, and technology sectors expected to be the primary beneficiaries of the recovery. Corporate balance sheets and private equity firms are flush with cash, with tight investment-grade and high-yield bond spreads providing abundant access to capital.

While inflation data is likely to ebb and flow through the year, inflation is predicted to cool this year, feeding into expectations of reduced borrowing costs. With rapid technological advances in artificial intelligence, life sciences and clean energy, many industry leaders will be looking to ramp up their capabilities by acquiring the competencies, human capital, and intellectual property of other industry players.

As the market becomes more bifurcated, with a widening gap between mega-cap technology companies and the rest of the market, there are many compelling bargains available, and renewed confidence in markets could be the catalyst for acquisitions.


Markets rallied across the board in February with the S&P 500 Index up 5.3% in the month while the S&P/TSX Composite Index rose 1.8% and the Nasdaq jumped 6.2%. Speculative fever is gripping markets again. The crypto sector seeing a surge in coin prices spurred by ETF inflows while the AI frenzy is seeing share prices of companies like Super Micro Computers go parabolic.

How much longer can the party last? Core inflation in Canada and the U.S. has been decelerating, but Treasury yields ended the month having risen across the board. Anticipated rate cuts are now expected at fewer occurrences and pushed back further. The path of interest rates may be down while the prospect for equities is up, but that path is likely to be filled with twists and turns.

With a pick-up of M&A activity in our core small-cap universe we are seeing a compelling merger arbitrage opportunity. Spreads are wide on a historic and absolute basis with a more predictable regulatory environment allowing us to analyze and avoid merger deals with elevated risk. We continue to hear from bankers, dealmakers, and the management and boards of the companies we follow that M&A activity is primed to likely rise with pent up demand. With abundant deal-flow, wide-merger arb spreads, and small cap M&A primed to rise. We are optimistic about the prospects for merger arbitrage returns this year.

Amar Pandya, CFA, is Portfolio Manager of the Pender Alternative Arbitrage Fund and the Pender Alternative Special Situations Fund at PenderFund Capital Management.


1. Investment Banking Scorecard, Deal Intelligence | as of March 14, 2024



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