Arbageddon dangers averted by only so much
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
By Jonathan Guilford
NEW YORK, Nov 12 (Reuters Breakingviews) -The biggest bet in merger arbitrage is that a bad losing streak will come to an end. Hedge fund managers trying to capitalize on the fate of M&A have been battered by aggressive competition cops and a scarcity of deals to balance out their portfolios. Both trends should reverse under President-elect Donald Trump, but his unpredictable style means more spectacularly bad trades await.
Higher interest rates made it harder for buyers and sellers to agree on valuation and restrained corporate combinations. Top U.S. trustbusters Lina Khan and Jonathan Kanter also led a charge against consolidation that spooked chief executives. Both factors contributed to deal-focused funds ranking last among six so-called event-driven strategies this year, with just a 3.2% return through October after bringing up the rear last year, too, according to indexes compiled by industry tracker HFR.
Multi-manager operations such as Millennium dumped traders who misread deals like fashion conglomerate Tapestry’s TPR.N planned $8.5 billion acquisition of handbag maker Capri CPRI.N. The rush into doomed trades was likely exacerbated by a lack of choice. As a result, event-driven funds with more than $1 trillion to invest were over-eager to believe that the Federal Trade Commission’s attempt to block the owners of Coach and Versace from merging would fail. Worse, higher borrowing costs meant that pods, as such teams of traders are known and who must account for their cost of capital daily, struggle to sit in deals considered safer, and which are therefore less profitable.
The possibility, however shaky, of further rate cuts should help, as will a changing antitrust regime. Plans by the Justice Department to overhaul bank merger reviews spelled trouble for the $35 billion sale of credit-card giant Discover Financial Services DFS.N to Capital One COF.N, but may now reverse. The target’s shares soared 20% following the election. Similarly, real estate data compiler CoStar’s CSGP.O $1.6 billion acquisition of industry software developer Matterport MTTR.O may have a smoother ride. And Kroger’s KR.N $25 billion merger with rival grocer Albertsons ACI.N probably will have a better chance at reaching compromise with the new administration even if it loses against the FTC in court.
Although Trump’s last term hewed to shorter, more predictable merger-review timelines that help boost annualized yields, investors would be foolish to expect a laissez-faire free-for-all. The president is mercurial, evidenced by his DOJ’s lawsuit in 2017 against AT&T’s T.N $85 billion takeover of Time Warner, owner of the president-elect’s bête noire news network CNN. More such caprices are inevitable and will leave arbs scarred.
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CONTEXT NEWS
After Donald Trump won the U.S. presidential election held on Nov. 5, share prices increased for multiple companies that are under agreement to be acquired but subject to review by antitrust authorities.
Merger arb has turned in meager returns of late https://reut.rs/3AM5QjR
Sellers with antitrust risk get a Trump bump https://reut.rs/3O4LK7D
Editing by Jeffrey Goldfarb and Pranav Kiran
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