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Announcing: Mergers and Acquisitions available through Pipeline

Mergers and Acquisitions (M&As) are a hotbed of news in finance. One bad deal can send a company's stock price spiraling while another can take it to the moon. For this reason, M&As can often pose a significant risk to quantitative trading strategies. For those who aren't familiar with M&As, Investopedia provides a short summary,

Mergers

“A merger happens when two firms, often of about the same size, agree
to go forward as a single new company rather than remain separately
owned and operated."

Acquisitions

"When one company takes over another and clearly established itself as
the new owner, the purchase is called an acquisition. From a legal
point of view, the target company ceases to exist, the buyer
"swallows" the business and the buyer's stock continues to be traded.”

While there are ways to trade directly on M&As (merger arb), this post will focus on these corporate events from a risk management perspective.

Risk Management

Both the target and acquiring company are publicly announced in an acquisition deal. These strategies pose a large risk to quant strategies because quant strategies, by definition, use historical price data or otherwise to make predictions about the future. However, when a stock becomes the target of an acquisition, the security becomes a fundamentally different stock with no continuity to its past. That means quant strategies attempting to trade on acquisition targets are trying to make predictions based on historical data that is no longer relevant to the given security. To avoid this, targets of an M&A should be removed from a strategy's portfolio.

The algorithm below shows you how to use M&A from a risk management perspective by excluding all securities that are the target of a Cash Acquisition offer. The available options are cash, stock, mixed, all. For those who are interested in learning more in how these corporate actions can affect a quantitative trading strategy, view the research walkthrough.

FAQ

What am I getting from these factors?

These factors are created from EventVestor's Mergers and Acquisitions dataset (available for $85/mo) and allow you to identify which stocks are targets of acquisitions or proposed acquisitions. You can search them by the offer payment type (cash, stock, mixed) and the number of business days since the announcement.

Do I know also know the acquiring security along with the target?

For now, you're only able to identify targets of mergers and acquisitions. While we plan to allow support for identifying acquirers in the future, we haven't reached that point yet.

This dataset missed a target, is the data broken?

Not all data is perfect. Sometimes our partners provide us imperfect data. Sometimes Quantopian’s processing of the data introduces problems. Please submit a ticket to [email protected]

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7 responses

Basic algorithm framework to use M&A Pipeline factors in an algo

Please find the framework below and post if you have any questions on how to use it.

Clone Algorithm
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Backtest from to with initial capital
Total Returns
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Alpha
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Beta
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Sharpe
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Sortino
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Max Drawdown
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Benchmark Returns
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Volatility
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Returns 1 Month 3 Month 6 Month 12 Month
Alpha 1 Month 3 Month 6 Month 12 Month
Beta 1 Month 3 Month 6 Month 12 Month
Sharpe 1 Month 3 Month 6 Month 12 Month
Sortino 1 Month 3 Month 6 Month 12 Month
Volatility 1 Month 3 Month 6 Month 12 Month
Max Drawdown 1 Month 3 Month 6 Month 12 Month
# Backtest ID: 57d1a449574e0412e0e1f6d3
There was a runtime error.

Very nice. I wonder how much of a risk this is (unless you are trading a small number of stocks).

Interesting to investigate how much sharper benefits but much more interesting to use acquirer + target details to model arb strategies.

Always something I have wanted to do. Of course Gordon Gekko had a rather different method of "arbing" M&A and the practice continues we understand!

Great. This solves an issue I had, whereby an acquisition target's volatility becomes very low, and my position sizes became so massive, I had to introduce a cap.

Another area which is nice to have is pending delisting. You can close out your positions in advance.

It should be noted that the price for this data is $85 per month and that this data is not part of the Q pipeline data bundle.

@Seong Lee
Thanks for posting sample algo using this dataset. My question: does it mean that only these 5 data fields are available?
AnnouncedAcqTargetType,
ProposedAcqTargetType,
BusinessDaysSinceAnnouncedAcquisition,
BusinessDaysSinceProposedAcquisition
IsAnnouncedAcqTarget

From the link: https://www.quantopian.com/data/eventvestor/mergers_and_acquisitions and its notebook, there are other useful information in the dataset table, e.g. target_type, is_crossboarder, deal_amount,price_pershare. Are these avaiable to access via pipeline not only research model?

Thank you.

I don't find this dataset satisfying. From my casual search of couple M&A deals, PCLN acquires OPEN on Jun 13. 2014 is missing. Also, for those rumor cases, the dataset doesn't follow through, so we have no indication of whether that rumor turns into reality or not. Finally, I know the price of the data set is quite low compared to Thomson Reuter's M&A database. But still, this is rather unsatisfying.