M&A Funds Are Hot

The global merger and acquisition scene is expected to see good momentum in 2010 as large corporate buyers as well as private equity players are likely to return to the market, a survey conducted by global consulting firm McKinsey said.

While M&A activity showed signs of resilience in the year 2009, conditions improved in the fourth quarter, and companies increasingly found attractive deals and the means to complete them.

This is a good news for M&A funds. They're not a gold mine, but their volatility is low, and they seldom lose money. The value of deals in November hit $323 billion, the highest monthly tally since July 2008. Five deals valued at more than $10 billion, including Novartis' (NYSE:NVS) bid for Alcon(NYSE:ACL) this month, have been announced since December.

Dealmaking will be driven by cash-rich companies looking for bottom-line growth, rather than private equity firms, which still face a challenging financing environment, says Bob Filek, partner with PricewaterhouseCoopers Transaction Services in Chicago. These corporate hookups are the bread and butter of merger arbitrage mutual funds, which have seen total assets nearly double in size over the past year. "The driver of this wave of mergers is global growth, and it's happening now," says Mario Gabelli, CEO of GAMCO Investors (NYSE:GBL) in Rye, N.Y. Source

The 20-year-old, $2.3 billion Merger Fund (MUTF:MERFX) has returned an average of 8% a year and lost money only twice.

The Gabelli ABC Fund (MUTF:GABCX), which has had one losing year out of 15, is the cheapest of the funds.

McKinsey says:"The increase in M& A activity appears set to continue in 2010, if current trends continue."

"We expect large corporate buyers will be particularly well positioned to take advantage of any new wave of M&A, but we also see private-equity firms returning to the market," McKinsey said in its report.

According to The Daily Telegraph the factors included from weaker currencies and stronger credit markets have come together to create the best conditions for international deals for decades.

Mark Richards, an analyst from Credit Suisse: " Credit markets have reopened and corporate bond yields have fallen making debt finance more affordable. Meanwhile, since costs have been cut during the downturn, many companies are relatively cash-rich. This means that the gap between cash-flow yields and financing costs is probably the most attractive it has been for 50 years."

Experts said deals are likely to come in a variety of sectors including housebuilding, banking and aerospace.