Throughout the first three quarters of 2024, Global M&A activity totaled $2.3 trillion. The technology sector led in activity with a total volume of $375 billion, accounting for 16% of overall value, followed by Energy & Power at 16%/$374 billion and Financials at 12%/$308 billion. Drivers of M&A have recently been mixed, according to Gabelli Partners. Portfolio Managers Ralph Rocco, Willis Brucker and Paolo Vicinelli point out that there have been some headwinds in recent years, namely a hawkish regulatory environment fostered by aggressive anti-trust regulators in the US, who were suing deals based upon novel antitrust theories. “This aggression likely led to some management sitting on the M&A sideline. For those companies pursuing M&A, the aggressive regulators dissuaded some managements from pursuing deals after the deal deadline, caused spreads on other deals to widen, and were successful in blocking a few deals”. Nevertheless, the team points out that some tailwinds have emerged lately, leading to increased deal volumes, and have generally been positive drivers of performance.
Rocco, Brucker and Vicinelli are the portfolio managers leading the GAMCO Merger Arbitrage strategy, which has been in place since its launch in 1985 and has a UCTIS version, the GAMCO International Sicav GAMCO Merger Arbitrage UCTIS – Class I USD, launched in 2011. The investment process has remained unchanged over these 39 years, irrespective of whether the market environment was positive or negative. “We take what we believe is a conservative approach to M&A investing,” they say.
They tipically initiate deals with a small position size, which they may increase as deal hurdles and milestones are met. Position sizes are generally limited to ~5% of the total portfolio at cost, which contributes to the desired outcome of being diversified. Finally, they continuously monitor pending transactions for all the elements of potential risk, including: regulatory, terms, financing and shareholder approval. “We trust that our consistent approach will enable us to continue to earn positive risk-adjusted absolute returns for our clients”, PMs add.
Can you explain your approach to investing in M&A in the public markets?
The announcement of a deal is the beginning of our investment process. Simply stated, merger arbitrage is investing in a merger or acquisition target after the deal has been announced with the goal of generating a return from the spread between the trading price of the target company following the announcement and the deal price upon closing. This spread is usually relatively narrow, offering a modest nominal total return. Since deals generally close in much less than a year’s time, this modest total return translates into a much more attractive annualized return.
The objective of our merger arbitrage portfolios is to provide positive “absolute returns,” uncorrelated with the market. Returns are dependent on deal closures and are independent of the overall stock market movement. Deals complete in all types of market environments, including the recent 2022 market decline, which led to a +2.8% performance for the Merger Arbitrage strategy fund while the broader equity and fixed income markets were down double digits.
We have been managing dedicated merger arbitrage portfolios since 1985 as a natural extension of Gabelli’s Private Market Value with a CatalystTM methodology that is utilized in our value strategies. In 2011, we opened the strategy to European investors and have earned positive net returns for our clients in 13 consecutive years. The strategy is available in several currencies, including USD, EUR, GBP, and CHF.
We invest globally across a variety of listed, publicly announced merger transactions. Our portfolios are highly liquid, with low market correlation. Historically, the volatility is approximately 1/3 that of the S&P 500, and our beta is roughly 0.15. We watch and wait for transactions with high strategic and synergistic rationale in industries we know well, leveraging the fundamental research and collective knowledge of over 30 Gabelli industry analysts, who follow and analyze companies within our proprietary Private Market Value with a Catalyst investment methodology. They are experts in their areas of coverage. We comb through filings and merger agreements, and speak with management in order to outline a strong and clear path for deals to be completed.
You mentioned the aggressive anti-trust regulators impacted recent returns. Do you anticipate any changes in regulation under the Trump administration next year?
We believe the incoming Trump administration will usher in a much more deal friendly environment, with the expectation that there will be a change in leadership at both the Department of Justice (“DOJ”) and the Federal Trade Commission (“FTC”). We have already seen an increase of new deals announced after President Trump’s successful election. With friendlier M&A regulators paired with lower interest rates, we anticipate a deal boom for 2025, which may continue over the next four years.
How is the Fed’s rate cutting cycle affecting M&A activity?
In 2023, the U.S. Federal Reserve ended its series of interest rate hikes. This helped provide acquiring company managements with certainty of financing cost, giving confidence to M&A. With rate cuts beginning in 2024 comes lower costs of financing, which further encourages managements. Additionally, the steep market decline in 2022 caused market price dislocations, which prompted targets and acquirers to come to new price understandings. This began to wear off in the second half of 2023 into 2024.
While we have no crystal ball into the Fed’s actions, its comments indicate, and the market anticipates, further rate cuts to follow in the new year. We believe that, with rate cuts, deal volume should increase, as acquirers will be able to take advantage of the lower costs to finance their acquisitions, and further bolster M&A activity in the year ahead.
How are you positioned into the near year?
Our process is sector agnostic. We approach each deal on a risk/reward basis, investing in deals that we believe have the highest likelihood of closing. Our sector exposure is generally indicative of where we see attractive deals.
We are fully invested and are bullish on the M&A environment in the coming year due to favorable tailwinds:
- deal spreads are near the highest level in nearly a decade,
- a more favorable anti-trust/regulatory environment,
- prospect of further rate cuts, and
- an expected increase in deal volume under the Trump administration
If you are interested in learning more about the potential benefits of investing in M&A in today’s markets, the Gabelli UCITS team is available at SICAVInfo@gabelli.com or by calling +1-914-921-5135. Please visit us at www.gabelli.com/sicav for more information on our UCITS funds.
To access our proprietary value investment methodology, and dedicated merger arbitrage portfolio we offer the following UCITS Funds in each discipline:
GAMCO MERGER ARBITRAGE
GAMCO Merger Arbitrage UCITS Fund, launched in October 2011, is an open-end fund incorporated in Luxembourg and compliant with UCITS regulation. The team, dedicated strategy, and record dates back to 1985. The objective of the GAMCO Merger Arbitrage Fund is to achieve long-term capital growth by investing primarily in announced equity merger and acquisition transactions while maintaining a diversified portfolio. The Fund utilizes a highly specialized investment approach designed principally to profit from the successful completion of proposed mergers, takeovers, tender offers, leveraged buyouts and other types of corporate reorganizations. Analyzes and continuously monitors each pending transaction for potential risk, including: regulatory, terms, financing, and shareholder approval.
Merger investments are a highly liquid, non-market correlated, proven and consistent alternative to traditional fixed income and equity securities. Merger returns are dependent on deal spreads. Deal spreads are a function of time, deal risk premium, and interest rates. Returns are thus correlated to interest rate changes over the medium term and not the broader equity market. The prospect of rising rates would imply higher returns on mergers as spreads widen to compensate arbitrageurs. As bond markets decline (interest rates rise), merger returns should improve as capital allocation decisions adjust to the changes in the costs of capital.
Broad Market volatility can lead to widening of spreads in merger positions, coupled with our well-researched merger portfolios, offer the potential for enhanced IRRs through dynamic position sizing. Daily price volatility fluctuations coupled with less proprietary capital (the Volcker rule) in the U.S. have contributed to improving merger spreads and thus, overall returns. Thus our fund is well positioned as a cash substitute or fixed income alternative.
Our objectives are to compound and preserve wealth over time, while remaining non-correlated to the broad global markets. We created our first dedicated merger fund 32 years ago. Since then, our merger performance has grown client assets at an annualized rate of approximately 10.7% gross and 7.6% net since 1985. Today, we manage assets on behalf of institutional and high net worth clients globally in a variety of fund structures and mandates.
Class I USD – LU0687944552
Class I EUR – LU0687944396
Class A USD – LU0687943745
Class A EUR – LU0687943661
Class R USD – LU1453360825
Class R EUR – LU1453361476
GAMCO ALL CAP VALUE
The GAMCO All Cap Value UCITS Fund launched in May, 2015 utilizes Gabelli’s its proprietary PMV with a Catalyst™ investment methodology, which has been in place since 1977. The Fund seeks absolute returns through event driven value investing. Our methodology centers around fundamental, research-driven, value based investing with a focus on asset values, cash flows and identifiable catalysts to maximize returns independent of market direction. The fund draws on the experience of its global portfolio team and 35+ value research analysts.
GAMCO is an active, bottom-up, value investor, and seeks to achieve real capital appreciation (relative to inflation) over the long term regardless of market cycles. Our value-oriented stock selection process is based on the fundamental investment principles first articulated in 1934 by Graham and Dodd, the founders of modern security analysis, and further augmented by Mario Gabelli in 1977 with his introduction of the concepts of Private Market Value (PMV) with a Catalyst™ into equity analysis. PMV with a Catalyst™ is our unique research methodology that focuses on individual stock selection by identifying firms selling below intrinsic value with a reasonable probability of realizing their PMV’s which we define as the price a strategic or financial acquirer would be willing to pay for the entire enterprise. The fundamental valuation factors utilized to evaluate securities prior to inclusion/exclusion into the portfolio, our research driven approach views fundamental analysis as a three pronged approach: free cash flow (earnings before, interest, taxes, depreciation and amortization, or EBITDA, minus the capital expenditures necessary to grow/maintain the business); earnings per share trends; and private market value (PMV), which encompasses on and off balance sheet assets and liabilities. Our team arrives at a PMV valuation by a rigorous assessment of fundamentals from publicly available information and judgement gained from meeting management, covering all size companies globally and our comprehensive, accumulated knowledge of a variety of sectors. We then identify businesses for the portfolio possessing the proper margin of safety and research variables from our deep research universe.
Class I USD – LU1216601648
Class I EUR – LU1216601564
Class A USD – LU1216600913
Class A EUR – LU1216600673
Class R USD – LU1453359900
Class R EUR – LU1453360155
GAMCO CONVERTIBLE SECURITIES
GAMCO Convertible Securities’ objective is to seek to provide current income as well as long term capital appreciation through a total return strategy by investing in a diversified portfolio of global convertible securities.
The Fund leverages the firm’s history of investing in dedicated convertible security portfolios since 1979.
The fund invests in convertible securities, as well as other instruments that have economic characteristics similar to such securities, across global markets (but the fund will not invest in contingent convertible notes). The fund may invest in securities of any market capitalization or credit quality, including up to 100% in below investment grade or unrated securities, and may from time to time invest a significant amount of its assets in securities of smaller companies. Convertible securities may include any suitable convertible instruments such as convertible bonds, convertible notes or convertible preference shares.
By actively managing the fund and investing in convertible securities, the investment manager seeks the opportunity to participate in the capital appreciation of underlying stocks, while at the same time relying on the fixed income aspect of the convertible securities to provide current income and reduced price volatility, which can limit the risk of loss in a down equity market.
Class I USD LU2264533006
Class I EUR LU2264532966
Class A USD LU2264532701
Class A EUR LU2264532610
Class R USD LU2264533345
Class R EUR LU2264533261
Class F USD LU2264533691
Class F EUR LU2264533428
Disclaimer:
The information and any opinions have been obtained from or are based on sources believed to be reliable but accuracy cannot be guaranteed. No responsibility can be accepted for any consequential loss arising from the use of this information. The information is expressed at its date and is issued only to and directed only at those individuals who are permitted to receive such information in accordance with the applicable statutes. In some countries the distribution of this publication may be restricted. It is your responsibility to find out what those restrictions are and observe them.
Some of the statements in this presentation may contain or be based on forward looking statements, forecasts, estimates, projections, targets, or prognosis (“forward looking statements”), which reflect the manager’s current view of future events, economic developments and financial performance. Such forward looking statements are typically indicated by the use of words which express an estimate, expectation, belief, target or forecast. Such forward looking statements are based on an assessment of historical economic data, on the experience and current plans of the investment manager and/or certain advisors of the manager, and on the indicated sources. These forward looking statements contain no representation or warranty of whatever kind that such future events will occur or that they will occur as described herein, or that such results will be achieved by the fund or the investments of the fund, as the occurrence of these events and the results of the fund are subject to various risks and uncertainties. The actual portfolio, and thus results, of the fund may differ substantially from those assumed in the forward looking statements. The manager and its affiliates will not undertake to update or review the forward looking statements contained in this presentation, whether as result of new information or any future event or otherwise.
