(FROM THE WALL STREET JOURNAL 8/24/15) 
   By Shayndi Raice and Liz Hoffman 

The gap between the price offered and the trading price of a number of companies that are subject to pending takeover bids widened dramatically last week, a sign of investor nervousness about deals whose outcome could help determine whether the merger boom continues.

The gap is known as an "arb spread" and serves as an indication of what traders stand to make investing in a target company in anticipation of a deal's completion. Wider spreads suggest eroding confidence among investors that announced deals will close.

In the case of Royal Dutch Shell PLC's agreement to buy BG Group PLC, the year's largest announced deal, the spread widened to 13.7% Friday from 11.4% a week earlier. That is the widest since the deal was announced in April, as investors fret over the possibility that plummeting oil prices could cause Shell to walk away. The oil-and-gas giant has said it is committed to the takeover, which it says makes sense at virtually any oil price.

Spreads on other deals also increased sharply, including the $35 billion marriage of oil-field-services providers Halliburton Co. and Baker Hughes Inc. and the $37 billion combination of chip makers Avago Technologies Ltd. and Broadcom Corp.

Widening spreads don't necessarily mean deals are in trouble, and spreads often fluctuate widely before mergers close. Walking away from a takeover is costly, and market volatility usually doesn't give a company grounds to do so.

But the moves reflect investor skittishness after some big, high-profile deals failed to materialize last year and serves as a reminder of the fragility of the M&A market.

Should any of the big, pending deals falter, it could give pause to others contemplating major tie-ups.

With roughly $3 trillion in announced global merger volume, according to Dealogic, this year is on pace to surpass 2007 as the busiest ever for deal making. A key ingredient of the boom has been lofty equity prices, which give buyers a strong currency for acquisitions. A significant dent in them could jeopardize a record finish.

Some hedge-fund managers who invest in deals said they are on heightened alert following the market declines. Much of their focus is on the roughly $70 billion Shell-BG combination, and the possibility it could fall apart or be renegotiated. Some firms that have placed bets on the deal said the chances of that are slim, in part because Shell would have a difficult time finding another way to boost its position in the natural-gas market so significantly.

But they say there is a feeling among many deal traders that they need to reduce some of the risk they are taking in the current environment. That means unwinding positions, which causes spreads to widen.

Despite providing an abundance of deals to choose from, the M&A boom hasn't yet generated big profits for these specialists, in part because many transactions haven't yet closed and some still face regulatory challenges. Event-driven hedge funds, which bet on mergers and other corporate shake-ups, were up just 1.5% this year through the end of July, according to research firm HFR Inc.

They were the worst performers among major hedge-fund strategies in 2014, stung by AbbVie Inc.'s aborted takeover of Shire PLC and a potential deal between Sprint Corp. and T-Mobile US Inc. that failed to materialize.

For patient, steel-nerved investors, though, there could still be big profits to be made. A wager placed Friday that Aetna Inc. will complete its $34 billion takeover of rival health insurer Humana Inc., for example, is set to return some 22% should the deal close on schedule in late 2016.

The spread, which largely reflects nervousness that regulators will reject the deal and possibly an accompanying tie-up between Anthem Inc. and Cigna Corp., rose from 21.2% a week earlier. That is a relatively modest move showing that not all spreads widened dramatically last week.

Some of those who help arrange mergers say they aren't overly concerned, with some pointing out that stock-price declines make targets more affordable. But, they acknowledge, should this be the start of a longer-term bear market, all bets are off.

"The biggest risk to deals was that equity prices would go up too far, too fast," said Frank Aquila, a senior M&A partner at law firm Sullivan & Cromwell LLP. "As long as the slide doesn't become a rout, this should be good for M&A."

A bigger threat to the boom than falling stock prices could be an evaporation of the easy credit that has fueled deal making.

Market declines could cause a temporary pause "as people collect their thoughts," said Daniel Wolf, a New York-based M&A lawyer with Kirkland & Ellis LLP. "But overall, the availability of low-cost debt financing will be the bigger driver."

Bankers also remain sanguine.

"Whilst the recent market volatility may impact short-term decision making, most participants in the M&A market take a long-term view," said Francois-Xavier de Mallmann, global co-head of consumer, retail and health-care investment banking at Goldman Sachs Group Inc. in London.

 

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(END) Dow Jones Newswires

August 23, 2015 20:04 ET (00:04 GMT)

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