Evening Brief – 07.21.23
Merger arbitrage traders, or hedge funds that effectively wager on the outcome of M&A agreements, have underperformed this year amid a large scale back in deal activity. And new criteria for the M&A industry that were issued this week by the Federal Trade Commission (FTC) and the Department of Justice (DoJ) may suggest things could get uglier for these funds, according to analysis published by the Financial Times.
In an arbitrage strategy, hedge funds acquire stakes in companies that are slated for acquisition with the expectation, based on the disclosed per-sale price, that shares will be sold at that price. However, the strategy has not gone as anticipated so far this year. Citing data from Hedge Fund Research, the FT reported that merger arbitrage traders have lost an average of 2% in 2023.
Meanwhile, increased regulatory scrutiny from the FTC and DoJ has already curbed some major deals, including the $13.4 billion TD Bank/First Horizon and $28.3 billion Amgen/Horizon Therapeutics deals, creating “agita” for merger arbitrage traders.
“This is the craziest environment I think anyone has ever gone through,” a merger arbitrage specialist told the Financial Times. “It’s not just hostile to deals but it’s particularly unpredictable.”
Regulatory oversight will likely gather momentum. This week, the FTC and DoJ unveiled 13 proposed M&A guidelines that “Mergers should not eliminate a potential entrant in a concentrated market” as well as calls for increased examination on competition “when an acquisition involves partial ownership or minority interests.”
Yet, there is still hope for merger arbitrage traders following the revival of the $75 billion Microsoft/Activision Blizzard deal, which has boosted profits for some merger arbitrage funds.
Moreover, the “shock” of inflation and interest rates that has slowed M&A activity so far this year is dissipating, Blackstone president Jonathan Gray told the Financial Times this week, suggesting “markets will normalize, and transaction activity will pick back up.”