Mergers and acquisitions activity is on the rise. But how to capitalise on these opportunities also matters.
The mergers and acquisitions landscape has changed significantly over the past year. A strong flow of deals, a favourable regulatory environment, and positive results in transaction closures have combined to create a wider and more attractive range of opportunities. But it is not enough for opportunities to exist: how investors access them also matters. In our view, the current environment particularly favours not only merger arbitrage but its application through a systematic approach.
There are several reasons for this. Firstly, we have observed a decline in deal break rates, that is, in the percentage of announced mergers or acquisitions that ultimately do not get completed. This trend has eliminated a potential source of pressure on profitability and has also reduced closing times, allowing investors to monetise their positions and reinvest capital more quickly. Competition among buyers has also increased, which can create significant upside potential for those operating arbitrage strategies.
Why a systematic approach makes sense
But the expansion of the universe of opportunities is only part of the story. In our opinion, the very nature of these opportunities has also changed. A lower number of failed transactions may reduce the dispersion between the outcomes of different transactions. And this is relevant because, historically, a significant portion of the alpha generated by traditional merger arbitrage strategies came precisely from avoiding those deals that ended up failing.
When there are few transactions that do not come to fruition, discretionary managers have less room to differentiate themselves through deal selection.
In other words, when outcomes are more predictable, it may be more valuable to take a broad approach than to be selective. In this type of environment, we believe the goal should not be to concentrate risk but to diversify it as much as possible. A systematic approach is precisely designed for this, maintaining simultaneous exposure to a large number of transactions.
At the same time, the increase in deal volume may make it difficult for discretionary managers to thoroughly analyse all available opportunities. This potentially reinforces the value of a scalable, consistent, and repeatable investment process.
The efficiency of deal spreads
One of the defining characteristics of merger arbitrage is the relative transparency of the investment opportunity. In our opinion, every deal should allow for answers to four fundamental questions:
- What is the potential return if the deal goes through?
- What is the likelihood that the expected scenario will materialise?
- What would the potential loss be if it does not happen?
- How long will one have to wait to achieve that return?
Generally, the answers are quite clear. Investors know, for example, how much they can earn if an acquisition is completed because the final value is contractually established. They also do not need to guess how the market values the probability of closure, as that expectation is reflected in the stock price.
If a company is set to be acquired for $100 per share and is trading at $99.50, there is little time left for the deal to complete and the potential downside in case of a break is limited; the market is practically reflecting a high probability that the transaction will go through.
Of course, there are also downside risks. These scenarios can be estimated from the price at which the stock was trading before the deal was announced and by observing how other comparable companies have behaved since then.
The approval process for a deal is also relatively concrete. It includes established review periods that allow investors to rely on a broad historical record of similar transactions as a reference.
As tools such as machine learning and artificial intelligence become more mainstream, we expect that greater capacity to process information will allow for faster and more thorough assessment of the risks of each deal. If markets become increasingly efficient, generating extraordinary returns solely through discretionary analysis could become more difficult.
In that context, it may make more sense for investors to consistently capture the risk premium embedded in merger spreads than to try to individually identify supposedly mispriced deals.
The role of diversification and the limits of manager selection
Merger arbitrage inherently presents an asymmetric return profile. Most deals generate modest profits when completed, while a small number of failed transactions can lead to considerably larger losses.
This asymmetry also has important implications for manager selection. Since historically only a few deals fail each year, performance differences may be disproportionately influenced by exposure to a very small number of transactions.
The investable universe for most large merger arbitrage strategies typically ranges between 100 and 150 deals per year. If around 5% do not complete, we would be talking about five to seven failed deals annually.
Therefore, the relative performance of managers will largely depend on whether they were exposed to those few deals and the weight they had in their portfolios.
A manager who has avoided several problematic transactions may outperform the market, whether due to the quality of their process or simply by chance. In practice, this means that investors should use longer time horizons to assess a manager's true ability, adequately estimate the expected variability of their results based on the recent environment, and carefully analyse fees.
Once again, we believe that a systematic implementation can help reduce concentration risk and limit the impact of any individual transaction. Returns thus depend on a repeatable and diversified exposure to the risk premium associated with mergers, rather than on the success or failure of a few specific transactions.
In our opinion, merger arbitrage offers in 2026 a particularly attractive combination of fundamentals and structural characteristics. Corporate activity is increasing, the results of completed deals remain favourable, and the universe of opportunities continues to expand.
But in an environment marked by high closure rates, increasing market efficiency, and asymmetric return distributions, we believe that the arguments for broad diversification, disciplined execution, and systematic exposure to the merger risk premium are stronger than ever.