How to Profit from Mergers and Acquisitions

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How to Profit from Mergers and Acquisitions

In March of 2015, CNBC reports there were about $5.8 billion in total net assets tucked away in merger arbitrage mutual funds and ETFs, which are investments that help investors take advantage of the spread between post-merger and sale price.

What typically happens in these scenarios is that the price of the stock of the takeover target will quickly rise, but the sale price isn’t achieved until immediately before the completion of the transaction.

Merger arbitrage is a fancy term for buying stocks of takeover companies, which are sold within a day or two of the final sale, according to the report from CNBC. The money is made based on the amount of difference between the price of the stock immediately following the announcement and how much the final sale price is.

It can be a good time to wade into merger investments, particularly with Firmex reporting more companies are embracing artificial intelligence to speed up and improve the process of due diligence.

Many investors are interested in learning how they can make money and profit from the growing world of mergers.

Go For Mutual Funds

Irrespective of whether you’re trying to invest in companies that are entering mergers, or you’re just looking for a way to hedge your bets as an investor, mutual funds represent a good option. There are arbitrage-driven mutual funds, which present the benefits of investing in mergers and acquisitions, but as with any mutual fund, they’re diversified, which shields you from some of the higher risk levels that can come with these merger strategies.

Research Industries

One of the best things you can do to guide your strategy of how you invest in merger and acquisitions is to get to know an industry really well. The more you learn about that industry, the more you’re going to understand the impact of mergers, and it will help you make more informed decisions. When you know the industry,  you have the ability to see trends that are happening as a whole, which can help you make more factually-based moves in terms of your investing. If you know an industry on a deep level, you’re also going to be more prepared to make accurate predictions that can help you profit.

Don’t Go All In

Most professionals say that investing in mergers and acquisitions is what they call a “niche” strategy, and it’s essential to view it as such if you want to be successful. There aren’t a lot of arbitrage mutual funds available, and since it’s not seen as a conventional strategy, it can be best to put only a small percentage of your assets here. This is particularly true if you’re not going to go the mutual fund route, and instead are looking at one specific merger.

We’re in an environment where mergers and acquisitions are commonplace, and continuing to be the route many businesses take. There are certainly opportunities to make money as an investor, with a smart, well-thought out strategy.

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