Interviews
We believe the current environment should be favourable to our M&A fund
Neil B. Kennedy von Harbert Management Corporation nutzte den 85. Hedgework im Juni, um die aktuelle Situation an den M&A-Märkten zu beleuchten und zugleich seinen Fonds vorzustellen: Der SIXTINA Harbert Event Opportunities Fund ist ein gemeinsamer UCITS-Fonds von Harbert und Natixis. Das Interview mit Neil B. Kennedy beleuchtet die Highlights der Veranstaltung.
Hedgework: Obviously the M&A-markets are coming back. What M&A-Volume do you expect for 2011?
Neil B. Kennedy: M&A volume has been generally strong in 2011. The market grew over 20% last year and has continued its uptrend in 2011. We are not yet back to the peak year of 2007 during which there were $4.6 trillion of deals announced, but we have a chance to approach 2006, which was a very healthy market with $3.9 trillion of M&A. Just as important as volume has been the high quality of transactions that we’ve seen so far this year, primarily strategic deals or financial deals with manageable leverage.
Hedgework: M&A-Markets are very cyclical. Can you explain why?
Kennedy: The cyclicality has to do with understanding that M&A is affected by economic activity, the health of the financial markets and outlook, all of which tend to follow the normal business cycle.
Hedgework: And how does the cycle of the M&A-market affect your business?
Kennedy: The event-driven and merger arbitrage business is certainly affected by the overall M&A market in a few ways. In the most obvious, the greater the level of activity, the larger the investable universe, which also tends to create more attractive merger arbitrage spreads. Secondly, an active market for corporate control is a signal of bullishness about the economy and we then see more situations with hostile tones or overbids, which, if positioned correctly, can be highly lucrative. Finally, the M&A cycle also flows through to other corporate actions. Quite often, when a Board of Directors is approached or is considering a sale, they also explore other alternatives such as a corporate breakup or a spinoff/split-off and we find event-driven opportunities as a result. In fact, approximately 70% of the companies put into play ultimately end up being sold or undertaking other significant value-enhancing alternatives.
Hedgework: What are the key drivers of the M&A-market?
Kennedy: The willingness of CEOs and private equity firms to make acquisitions is a function of many factors, including valuation, credit markets, the market environment and their own optimism. In fact, CEO confidence, which is tied to the business cycle, is one of the best predictors of the level of M&A activity. After hitting a trough two years ago, CEO confidence has returned to 2007 levels. Even with the recent spike in volatility related to Greek debt concerns, equity market volatility is relatively low. In addition, there are a number of structural realities in the economies of the developed world that are converging to create a strong M&A environment. Among these are record low interest rates and the need to grow both top and bottom lines in the growth-challenged Western markets.
Hedgework: Why does the CEO Confidence Index plays such an importance role in your thoughts?
Kennedy: As a practical matter for our business, the CEO Confidence Index, and other such measures, correlates very well as leading indicators of M&A activity. Simply put, like anyone making an investment decision, most CEOs loathe uncertainty and want visibility before committing significant resources to a deal with which they will have to live for a long time. The recent market reaction to deals, where the acquirer’s stock gets bid up after announcing an M&A transaction, will go a long way to stoking that confidence.
Hedgework: A word on the interest rate situation?
Kennedy: Interest rates are near historically low levels both on an absolute basis as well as relative to risk-free assets. The world’s largest 1,000 nonfinancial companies are holding about $3.5 trillion in cash. In the U.S., our estimate is that nonfinancial companies by one measure currently hold approximately $500 billion of excess cash versus a more normalized level. In addition, borrowers are able to access cash at very low rates. For instance, Sanofi-Aventis estimated the cost of debt for its $20 billion Genzyme deal at 2.5% to 3% and Caterpillar recently sold $4.5 billion of bonds at an average cost of 2.87% to finance its Bucyrus purchase. Access to capital is not an impediment to doing deals in today’s market.
Hedgework: We all have seen a bumpy decade between 2001 and today. What is the difference in the quality of the S&P 500 companies between then and today?
Kennedy: What a decade it has been! As we discussed, a key difference between 2001 and today is that balance sheets today are dramatically healthier than they were a decade ago, but growth prospects have diminished. S&P 500 companies have increased their cash balances by 2.5x during the decade and leverage levels are materially lower, by one-third according to a recent JPMorgan report. So companies have spent the last decade expanding products and pursuing growth in emerging markets to build these massive war chests, but now see reduced organic growth prospects. Valuations reflect this and they are still off anywhere from about 20% to 40% from those heady times. What this means is that while the quality of S&P 500 companies today is undoubtedly higher, they face greater challenges in the future and many of them are pursuing M&A as an adjunct to their organic growth strategies. Keep in mind that both during and after the last merger wave in the ‘90s, many corporations developed in-house M&A practices as a core competency and today look at it as a key engine of growth.
Hedgework: What does that mean for your business?
Kennedy: It should bode well for disciplined event-driven investors such as the Harbert Event Opportunities Fund (“HEOF”).
Hedgework: Now let us go in detail. What is important for you? What is a typical situation for you as a M&A-Fund-Manager to invest?
Kennedy:
Our universe is event-driven and merger arbitrage situations in North America
and Western Europe. HEOF’s typical capital allocation is two-thirds to merger
arbitrage and one-third to event-driven situations. Merger situations are
defined as announced mergers only; we are not guessing who the next takeover
candidates are. We will get involved in merger arbitrage investments via a
plain vanilla spread but we will also utilize our options expertise to gain an
edge where the implied probabilities are mismatched
[I worked with the special situations team at the options house O’Connor &
Associates – now part of UBS – from 1982 to 1996]. In the current deal
universe, there are a few straightforward situations with attractive yields
where we are being rewarded for the patient deployment of capital. In addition,
we often find that our most attractive investments come from more complex
situations, be they transactions involving regulatory challenges or hostile
bidders or a myriad of other nuances. These are the opportunities in which we
tend to most actively layer an options structure in conjunction with an equity
component to develop a position with an asymmetric risk/reward profile in our
favour and which have been the most lucrative for our investors.
Hedgework: What are the main criteria for you to invest in a stock or not?
Kennedy: We analyze each investment on a case-by-case basis and make a decision based on fundamentals, valuation and a “hard” catalyst. We do intensive research by studying a company’s competitive dynamics and financial position. Our goal is to understand the magnitude and timing of an event and whether the market has already priced in the value creation or destruction. Finally, we establish a position based on our expected timeline of the event and optimize it with equities, options or a combination based on the best risk/reward.
Hedgework: How long do you on average invest in a stock?
Kennedy: The typical merger arbitrage situation resolves itself within about four to five months. Within the event-driven portfolio, we usually look for investments with a catalyst in a six month window.
Hedgework: What performance can an investor expect from a good M&A-Fund on average?
Kennedy: Rather than give you a number, I’d recommend that investors look at event-driven funds with low beta and volatility that have generated alpha over a long period of time. Our beta since inception has been 0.07 and we have generated 750 bps of alpha per year since inception. I would also say we believe the current environment should be favourable to our fund.
Hedgework: Some words on the Natixis Absolute Global SICAV – SIXTINA Harbert Event Opportunities Fund.
Kennedy: We are incredibly enthusiastic about our partnership with Natixis to offer a UCITS-compliant offering for European investors. We launched the fund on March 1st of this year and have had a very keen response. Natixis is a leading manager of alternative asset strategies with over €4 billion in specialized strategies. The SIXTINA platform is a terrific offering for investors seeking absolute return strategies through onshore regulated vehicles. As this M&A cycle develops, we think that the SIXTINA Harbert Event Opportunities Fund can be a central feature in helping investors to meet their absolute return goals.
Hedgework: Thank you very much for the interview.
Das Gespräch führte Uwe Lill
VITA
Neil B. Kennedy joined Harbert in November 2006 as Senior Managing Director and has nearly 30 years of merger arbitrage and event-driven investing experience. Most recently, Neil was with Hamilton Investment Management LLC (“HIM”), where he served as a managing member and as cohead of mergers at Hamilton Partners Ltd, HIM’s predecessor.
Previously, he served as executive director in the risk arbitrage and special situations group at Swiss Bank Corporation (“SBC”) and O’Connor & Associates, SBC’s predecessor. Prior to that, Neil was an options market maker on the floor of the American Stock Exchange. Neil is a graduate of the State University of New York (New Paltz).
Sixtina Harbert Event Opportunities Fund seeks to deliver absolute returns through investments in corporate events:
The Fund allocates investment capital to
i) announced merger transactions and
ii) catalystdriven corporate events in North America and Europe. The Fund also
employs a Dynamic Hedge overlay, which is important in protecting the generated
absolute returns.
The Harbert EO Managers, led by senior Portfolio Manager Neil Kennedy, believe this investment space offers compelling overall opportunities, applying their expertise in fundamental securities analysis and their experience in managing portfolio risk and protecting capital.
Kontakt
Christian
Salow / Natixis
Telefon:
+49 (0)69 971 53-132
Email:
christian.salow@de.natixis.com
www.natixis.com
