Covid consolidation bears low-hanging fruit for traders
No understatement is truer than the one about how “nothing will ever be the same again” following the coronavirus pandemic.
Businesses in the hundreds of thousands will not reopen. Millions of jobs have been lost. Billions of dollars have been wiped off the valuations of household brands and City darlings.
Past worries about Brexit seem negligible against a backdrop of rapid economic destruction.
A recalibration of the business landscape is already underway, driven by a mass of dealmaking in covid’s wake. Alphabet, Amazon, Apple, Facebook and Microsoft alone have announced 19 deals this year so far.
In crises, a wave of M&A isn’t uncommon: innovative businesses with weak balance sheets get gobbled up at fire sale prices by cash-rich competitors. And following Trump’s tax amnesty, the US has no shortage of cash-rich firms on the hunt for a bargain.
Closer to home, we’re witnessing a wave of consolidation in old sectors, as necessity, circumstance and opportunity bring forth the reality of long-term viability. The proposed £33bn Virgin Media/ O2 mega-merger – a new “national champion” to challenge BT and Sky – is the latest to rock the Square Mile.
As aforementioned, nothing will ever be the same. And that can include your portfolio. For those willing to expose themselves to the risk, merger arbitrage – trading stocks in companies that are subject to takeovers or mergers – is a tangled but rewarding way of riding the disruption of a tie-up.
Takeovers normally involve a big price premium. As long as there is a price gap, the potential for profit is significant.
A good example of trading the spread between the listed price and the buyer’s premium is LVMH’s purchase of Tiffany, announced last year. Between the 21st and 28th of October 2019, when the deal was announced, Tiffany’s value spiked around 46 per cent, reaching the level LVMH promised to pay.
Fast forward to this week, and the coronavirus-induced turmoil on financial markets has overshadowed the deal, causing Tiffany’s share price to plummet over 11 per cent during morning trading.
If you were holding Tiffany stocks, you might be kicking yourself. But by buying instead CFDs, you can bet against market movements. Had you anticipated the deal would fall through, Tiffany’s loss would be your win.
Given the state of the UK M&A market and, some might say, and its overzealous competition regulator, you might not be feeling so sanguine about the Virgin-O2 tie-up. It has shocked the markets in recent years by allowing BT to purchase EE, while blocking on spurious grounds the Sainsburys / Asda merger.
Past precedent is not befitting of the new economic reality. To get the wheels of commerce turning again, a wave of dealmaking will inevitably follow. Trading this to your advantage could be the light at the end of the covid tunnel.
Whether you’re buying stocks or taking short positions through CFDs, having the right partner to make the most of your M&A investments is a good place to start. At Fineco, we offer as standard professional trading tools, from our stock screener and charting solutions, to our multi-currency accounts that allow you to trade global M&A activity in the local currency.
This, combined with our competitive platform and transaction fee structure, is paramount to exploiting the current wave of M&A. Many of our competitors promise low fees or no-commission, but usually there is a catch; a hidden clause that gnaws into your hard-earned profits. For FinecoBank customers there is no compromise.
Fineco offers commission-free trading on CFDs, with no added spreads, at a premium level in the UK market, reaching beyond existing platforms to cater for professional and serious traders. The market may be in turmoil, the world may never be the same. That doesn’t mean there aren’t opportunities worth pursuing.