\nuncertainty continued to take their toll on manufacturing, exports and now capex. It is weighting on executive
\nconfidence and delaying some corporate operations. Yet, these concerns do not seem to question the relevance of
\nexternal growth, amid stalling internal growth opportunities, and declining reward from pure investors distribution
\nstrategy. Additionally, liquidity conditions remain supportive. Companies accumulated more debt and have less cash,
\nbut funding costs are low and acquirers continue to get banks\u2019 support as well as credit access. Moreover, corporate
\nvaluations (and hence M&A opportunities) remain affordable. In the U.S., the equity market value is in aggregate 14%
\nricher than the replacement cost (a more relevant book-value estimate), marginally higher than the long-term average.<\/p>\n
M&A patterns are also showing healthy dynamics. A healthy number of hostile deals (usually riskier but more
\nprofitable) tends to concentrate on smaller targets. Jumbo deals are increasingly funded by stock and cash
\ncombinations, also favorable for arbitrageurs. At 30% in average, deal premiums are attractive, yet not so high as to
\njeopardize operations. All in all, by most measures, M&A activity, which sets the menu of opportunities for arbitrageurs,
\nis consistent with mid-cycle patterns, neither too hot, nor too cold.<\/p>\n
The Merger Arb. backdrop is attractive given its strong diversification patterns.Well isolated from market volatility,
\nswings in fiscal\/regulation\/trade policies are however unsettling.<\/quote>
\n It contributed to moderate YTD returns (+1.5% on
\naverage). Volatility in deal spreads spiked, forcing managers to reduce exposures or take higher risks. Despite greater
\nvolatility, the risk of M&A break-up remained minimal (< 2% transactions failed), translating in elevated implied deal\nprobability and contributing to compress merger spreads. The average gross spread of 75 live and large deals stands\nat 6%, close to the long-term average. With only few compelling bidding war situations and external flows from carry\ninvestors, the best deals were crowded, leading to several hits to merger portfolios this year.\n\nThe merger environment may seem currently \u201caverage\u201d, but its returns-to-correlation profile outrank most other market\nsegments. Its carry favorably compares with credit or dividend yield, the strategy also shows strong diversifying\npatterns in allocations and decorrelation from risky assets, with consistent alpha generation. We are O\/W.\n\n![\"-426.jpg\"](\"https:\/\/www.next-finance.net\/http:\/\/beta.next-finance.net\/wp-content\/uploads\/2019\/09\/426.jpg\")
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