I am trying to run a simple back test on a M&A strategy.
The idea is to buy the target company for the length of the deal and obviously hope to see a profit. The weight given to each deal is decided by the size of the deal.
Some of the deals are part cash, part equity in my study. I have a field in my data called 'Stock Exchange Ratio - Buyer Shares' (SER). This field is defined as the number of shares being issued by the acquirer to the target.
So for example if the acquirer called ABC is buying the target called TAR in a part cash, part stock deal and the SER is 0.8. Then investors holding TAR will receive 0.8 shares of SER for every TAR share they hold.
So when I have deals that are not 100% cash I will get extra equity exposure that I need to hedge as I understand it.
For simplicity and practicality for hedging purposes I will use the MSCI World index. The question I have is to calculate how much of the index I need to short?
Portfolio Stocks Weight Stock Exchange Ratio - Buyer Shares ABC 50% 0 MNO 30% 0.6 GHI 20% 2.5
I take it I will need the beta's of the acquirer's? Just not sure how I'm supposed to be using the Stock Exchange Ratio - Buyer Shares.