Capitalizing on Merger Arbitrage Investment Opportunities in Asia Pacific Markets

Returns from Asia-Pacific merger arbitrage positions have proved consistently attractive over time, offering the additional benefit of portfolio diversification when compared to other equity strategies where returns are more susceptible to the vagaries of market cycles.

With a new wave of mergers and acquisitions (M&A) activity and promoter-led take-private deals, buoyed in some key markets by heightened geopolitical tensions, merger arbitrage thrives as an investment strategy for well-prepared investors. Cash-rich companies that have weathered COVID-19, opportunistic family controllers and private equity firms now sitting on record levels of dry powder are creating attractive merger arbitrage opportunities. These investors are focusing on businesses in distress and takeovers or privatizations of companies which are currently undervalued by the market.

In this piece, we highlight some of the key questions investors consider when analysing merger arbitrage investment opportunities in the key public M&A markets in the Asia Pacific region.

1. What are the primary methods of acquiring or consolidating control of this publicly listed company target?

An essential consideration in formulating the investment strategy is understanding the process by which the acquisition is to be undertaken. This drives various key investment considerations, including deal risk (e.g., approval thresholds and minority squeeze-out) and the likely investment timeline.

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Key issues to consider

Although uncommon, it is possible for an acquisition to switch from execution by way of a scheme of arrangement or statutory merger/exchange to a takeover (tender) offer. This may be the case where, for example, the target becomes subject to a competing bid or if the target board otherwise withdraws its approval for the acquisition, leading to a hostile bid situation

2. Will my investment in this publicly listed target company be disclosed to the market?

Publicly available position reporting can be a strategically critical and value-sensitive issue for merger arbitrage investors. In Asia, the disclosure rules for equity interests can be complex and require careful analysis on a case-by-case basis.

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Key issues to consider

Of the jurisdictions covered in the table above, Hong Kong and Singapore represent the high-water mark for disclosures, in the sense that they require most material equity interests, not just share ownership, to be publicly disclosed. In Japan and Korea, on the other hand, certain properly structured equity swaps and other forms of equity exposure may not need to be publicly disclosed. It is essential to carefully consider the nature of the proposed equity exposure instruments and the circumstances in which they are acquired and unwound, including any related short positions, which may trigger separate disclosure obligations.

Investors should also look out for U.S.-listed American depositary receipts (ADRs), which are common for Asia-Pacific issuers, as these can give rise to separate U.S. securities reporting to the Securities and Exchange Commission (SEC)—potentially resulting in a disclosure obligation at sub-five percent for investors who are required to report as a result of Section 13(f) of the U.S. Securities Exchange Act.2

In some jurisdictions, any dealings in relevant securities by target shareholders who already hold five percent or more during an offer period may also trigger a disclosure.

Footnotes

1 If a shareholder and any related parties acquire five percent or more of the total voting shares of a target company off-market from 10 or more persons within a six-month period, such shareholder must make a public tender offer. If a shareholder holds 10% or more of the total shares of a company, any subsequent increase or decrease of any size (even one share) will need to be publicly disclosed.

2 Note that Section 13(f) reporting may become less relevant for a number of investors in light of the SEC's proposed increase of the reporting threshold from US$100 million to US$3.5 billion (more information available here).

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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.