Does M&A activity help the sec lending market?

The Financial News reports on M&A not helping the securities lending market. The lead-in data are off (RMA provides a sample of data, not the universe) but good quotes from market participants.

Wrong kind of M&A dashes hopes of a rekindled securities lending market

Sophie Baker

05 Sep 2011

Despite a rise in mergers and acquisitions and increased activity in the market for initial public offerings, both have failed to reignite the securities lending market.

It suffered in the financial crisis from bans and restrictions on short selling. The amount of lendable securities almost halved, from $12.8 trillion at the end of June 2008 to $6.5 trillion at the end of March 2009, according to data compiled by the Risk Management Association.

While a recovery is evident, with total lendable assets at $10.2 trillion at the end of June 2011, custodians say the market is static.

Bill Foley, director of securities lending sales, market products and services at RBC Dexia Investor Services, said that M&A deals may not be the right kind to breathe life into the securities lending market.

He said: “M&A activity can be positive for the securities lending market, although not all M&A transactions offer the necessary arbitrage opportunity to drive securities lending demand.

If there has been an increase in M&A in 2011, we haven’t seen this have a significant impact on the securities lending market thus far.”

Foley said that if an acquisition is cash based, it will not bring about the necessary arbitrage opportunity that stock-based deals create.

Global mergers and acquisitions have jumped by 21% between the first and second quarters of this year, and a rise in the number of initial public offerings in the technology sector has increased expectations that some stocks which are perceived as overpriced may be shorted.

John Shellard, global head of equity lending trading at JP Morgan Worldwide Securities Services, said: “The status of the securities lending market varies by region.

We have seen a lot of activity in Asia, particularly in Hong Kong, South Korea and Taiwan. Europe has been relatively quiet, with investors waiting and watching the European sovereign debt situation.

But activity has picked up in the US on increased trading by quantitative and statistical arbitrage funds, driven by high volatility levels.”

For M&A players, Gareth Mitchell, head of trading for Europe, the Middle East and Africa for securities lending at Citigroup, said: “It is generally where there tends to be an arbitrage in the market between the two public companies involved. This arbitrage is based on the value of the companies and the expectation of the success of the bid.”

The arbitrage opportunity arises because deals almost invariably cause the target’s share price to rise while the bidder’s falls. But investors risk losing money if the deal drags on or falls through.

In the IPO market, Nick Bonn, executive vice-president and head of securities finance for State Street said that recent issues, such as the business-related social networking site LinkedIn, have created interesting shorts which can encourage securities lending.

If investors think shares are overpriced they will borrow in order to short them.

He said: “Right after an issue goes public is when there is the least amount of price understanding in the marketplace – everyone is still figuring out the right price.

It can lead to people thinking the security may be overpriced, and more often than not the IPO creates securities lending activity because of that.”

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