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ETF Specialist

Heightened Deal Activity Puts Merger-Arbitrage ETFs in Spotlight

Favorable conditions are in place for merger-arbitrage ETFs, including increasing M&A activity and the likelihood of higher interest rates.

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This week began with a flurry of merger-and-acquisition activity. While global M&A activity hit a three-year low in the first half of 2013, U.S. deal activity has been up nicely for the year to date (up 34%) relative to 2012. Some of the biggest deals have been  Berkshire Hathaway's (BRK.A) acquisition of H.J. Heinz,  Anheuser-Busch Inbev (BUD) acquiring Grupo Modelo, the merger of  T-Mobile US (TMUS) and MetroPCS, and  Comcast (CMCSA) acquiring from  General Electric (GE) the balance of NBC Universal that it didn't already own. Plenty of other major deals are pending, including  Dell's (DELL) proposed leveraged buyout,  Office Depot's (ODP) bid to acquire  OfficeMax (OMX) in what's being termed a merger of equals, the merger of  US Airways (LCC) and American Airlines parent AMR, and Linn Energy's (LINE) proposed buyout of Berry Petroleum (BRY).

Now, the three newly announced deals this week-- Omnicom (OMC) and Publicis Groupe coming together in a $35 billion merger-of-equals pairing, drugmaker  Perrigo (PRGO) acquiring biotech firm  Elan (ELN) for $8.6 billion, and Canadian retailer Hudson's Bay (HBC) buying retailer  Saks (SKS) for $2.4 billion--suggest that not only is U.S. M&A activity remaining strong but that global deal activity also may be picking up. Indeed, in all three of this week's headline deals, at least one partner is a foreign company. While the biggest headwind to further deals may be rich stock market valuations at present for potential acquisition targets, strong equity markets and historically low debt costs are continuing to create very favorable conditions for more deals. Also, corporate balance sheets remain flush with cash and plenty of private equity firms are now reaching their exit points for the flurry of buyouts that occurred in the 2005-08 time frame.

Robert Goldsborough does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.