How Can Alternative Data Help Traders Pre-Select Buyout Prospects?

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M&A Activity on the Rise, How Can Alternative Data Help Traders Pre-Select Buyout Prospects?

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Q3 2020 hedge fund letters, conferences and more

Identifying Potential Buyout Prospects

With M&A activity picking up again after the slump in the first half of 2020, due to COVID-19, one question that has arisen is whether funds can use alternative data to identify potential takeover prospects?

In our case, as a text analytics specialist, the question becomes whether news sentiment data, derived from scanning millions of articles and social media posts online, can provide clues as to which companies make decent buyout prospects?

On the face of it, you would not expect the news to provide alpha in this situation as it is by its very nature lagging - reporting on events after the fact. Yet, actually, there does seem to be some evidence that news and social media can provide a footprint for future buyouts.

Research by hedge fund QuantZ, found that a sentiment overlay helped optimize a takeover portfolio of stocks ripe for a buyout. Even without sentiment optimization, the strategy boasted a 41% hit rate.

With the sentiment overlay, which adjusted weightings according to sentiment, the strategy boasted increased absolute returns by an average of 8.6% per annum. It also led to a 46% improvement in the Sharpe ratio and a significant improvement in the strategy’s drawdown profile.

One reason for the improvement was its sensitivity at picking up on rumors of buyouts on the news and social media which often forewarned of the emergence of actual takeover bids themselves.

Private Jets

Another type of alternative data used for the purpose of determining buyout prospects is corporate jet flight path data.

Knowing which destination a corporate jet is destined for, for example, can sometimes be enough for analysts to deduce possible takeover bids in the brewing.

An example of this was when analysts noticed a corporate jet belonging to the U.S. oil firm Occidental had flown to Omaha, Nebraska.

There was no obvious reason for the visit but it was also true that the famous investor Warren Buffett’s firm Berkshire Hathaway was also located there.

At the time, a rivel of Occidental, U.S. oil titan Chevron, was in the news for making a $33bn bid to takeover a shale operator called Anadarko.

In the end, it turned out the Occidental flight to Omaha had been for the purposes of meeting Buffet, so reps of the company could ask him for a cash injection to help them put in a rival bid for Anadarko.

The news that Occidental had put in a rival bid of $38bn with the help of a $10bn cash injection from Buffet, led to a surge in Anadarko’s stock price; and traders who had used the data to join the dots could have made a killing on the rise.