Lately, Munn says he is seeing 4% to 6% annualized returns for safer transactions, compared with 3% to 4% in previous years. As the U.S. strengthens and the global economy stabilizes, boardroom confidence around the world usually grows, which should result in more transactions across a wider swath of industries, geographies and market capitalizations.
The path to profits for the fund depends on how the acquirer plans to finance a takeover. In a transaction where a company plans to acquire shares with cash, the fund may simply buy shares of the target company and wait for them to go up to the takeover price when the deal is completed. If an acquirer is using its stock to bring about the takeover, there’s a risk that the stock will fluctuate in the months it takes to complete the deal. To defuse that risk, the fund will typically purchase the target’s stock, while simultaneously selling short the shares of the acquirer. This hedging strategy helps ensure that even if the acquirer’s stock declines, the fund has locked in its return by selling short. In cases where acquirers use both cash and stock as currency, the managers will combine the two strategies.