Cash by Any Other Name

Most mergers and acquisitions are initiated as cash deals—the acquiring firm offers cash to the shareholders of the target firm. As a result, when a firm becomes the target, its stock price generally moves toward the proposed acquisition price and stays there until the deal closes. Through an examination of small cap mergers around the world following deal announcements, we find generally that stocks of companies targeted in a cash acquisition have offered returns no higher than those of a cash investment. So investors holding stock of targeted companies may therefore have unintentional cash-like exposure, meaning they may be giving up the desired expected returns associated with an equity investment. However, a systematic portfolio with process-driven yet flexible implementation can reduce unintentional cash-like exposure by thoughtfully divesting of such merger targets. Such an approach can pursue higher expected returns while managing risks and controlling costs.