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United States : Merger arbitrage funds eye takeover revival.

Investors are rushing to put money into merger arbitrage funds ahead of an expected recovery in dealmaking in spite of growing fears for the health of western economies.

After a dearth of M&A for much of the past two years, the first half of 2010 has seen a series of start-ups of hedge funds looking to profit from higher levels of takeover activity.

Europe s two biggest launches since 2008 Tyrus Capital, which raised $800m for its fund and Burren Capital, which raised $500m are event-driven funds that aim to trade on potential deals.

Merger arbitrage specialists, which aim to profit from the spread between a target group s share price after a takeover announcement and the closing price at completion of the deal, have seen $841m in net inflows since January

Managers see increasing opportunities to put new money to work.

M&A activity tends to go in cycles. There is a growing view that we re at the beginning of a new cycle, Gerard Griffin, head of GLG Partners event-driven team, said.

Companies have built up larger cash balances and the economy is not looking particularly strong, so earnings growth will have to come through synergies.

mergers-graphicSeveral large US funds such as Citadel, Moore, DE Shawand Perry Capital scaled back their European merger arbitrage operations during the economic crisis as deal activity dried up and their ability to borrow was curbed.

The lack of competition now means new funds can often make a high double-digit return in a couple of months from even the most mainstream deals, such as the 4.5bn ($5.8bn) takeover by Abbott Laboratories of the US of Solvay Pharmaceuticals of Belgium.

By the time Cadbury s board agreed to recommend the takeover by Kraft Foods in January this year, more than 30 per cent of the group was owned by hedge funds, compared with around 5 per cent before the US food group made its move.

A lot of players have left the market. A lot of the banks and a lot of the smaller funds have been driven out, Randy Freeman, chief investment officer of London-based Centaurus Capital, said.

With emerging market dealmaking outpacing the US and Europe for the first time in years, many of the new merger arbitrage funds have shifted focus to Latin America and Asia.

Some of the biggest deals they have profited from this year include a 2.8bn bid from Vivendi of France for GVT, a Brazilian broadband operator, and the $10.7bn bid for the African assets of Kuwait s Zain by Bharti Airtel, India s largest mobile network.

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Date:Jul 26, 2010
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