The Merger Market is Heating Up. Here's How to Cash In

It's got all the drama of a movie, only it's playing out in boardrooms instead of theaters. First came the $82.7 billion offer from Netflix (NFLX) to buy the film and TV studios of Warner Bros. Discovery (WBD) in December. Warner's Discovery Global unit, which includes CNN, Discovery and TNT Sports, would have been spun off to the public in late 2026.

Though not all rejoiced at the union, the two seemed destined to plight their respective troths, until Paramount Skydance (PSKY) showed up like a suitor shouting objections at the altar with a competing, hostile offer to buy all of Warner Bros. Discovery for $108.4 billion, which it then raised to $111 billion.

The cliffhanger was resolved in late February after Netflix bowed out, declining to raise its offer. The Hollywood deal is just one of an increasing number playing out on Wall Street, which turns out to be good news for investors looking for a low- volatility way to diversify their portfolio.

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Merger arbitrage, an alternative investment strategy that seeks to profit from the gap between the price of an acquisition target's stock and the takeover price after a deal is announced, tends to deliver returns that are a few percentage points above cash levels, independent of the stock or bond markets, says Mark Steffen, an alternatives strategist with Wells Fargo Investment Institute who currently recommends the strategy.

The more deals there are, the more opportunities, and deals are on the upswing after a few slow years following a blockbuster 2021.

"The third quarter's number was good — a continuation of the momentum we've seen," says Steffen. Increased volume, stable premiums over the target price and an easier regulatory climate that is helping to close deals more quickly all provide support for M&A, he says, adding that lower interest rates will help with financing.

A market-neutral approach for investors

A good way to invest is via the Merger Fund (MERFX). And "now is a good time," says Roy Behren, longtime co-manager of the fund.

"If you think the market has gotten ahead of itself, or things look a little toppy with AI, or the market has had a great run and you want to take some money off the table — the strategy's value lies in its ability to be a diversification tool for someone's portfolio," he says.

Gaps can persist between a target's price and an offer price because there's always some uncertainty about whether a deal will receive the regulatory approval, shareholder votes or financing it needs. The fund's payday comes when the deal goes through.

"If a transaction closes, we make money regardless of whether the market goes up, down or sideways," says Behren. "It's a market-neutral investment."

Behren and co-manager Michael Shannon are skilled at handicapping the odds of completion. "We're fairly disciplined. We only invest in announced transactions; we don't speculate about future targets or invest on rumor," he says.

The fund has returned 8.4% over the past 12 months. That might not seem like much compared with 18.1% for the S&P 500, but during the market's early 2025 tariff tantrum, the fund was essentially flat while stocks sank 12% and bonds dropped 1%.

In 2022, when the S&P 500 cratered 18% and the Bloomberg U.S. Aggregate bond benchmark lost 13%, Merger Fund eked out a 0.7% gain. The fund carries a sales charge of 5.5% but can be purchased load-waived with no transaction fee at platforms including Fidelity and Schwab. The expense ratio is 1.56%.

For the record, Behren, who says the fund has a stake in Warner Bros., had no spoilers about how the current bidding war would end when we talked to him. "I think it's going to play out with a higher price for Warner Bros.," he says.

Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

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