Arbageddon dangers averted by only so much

Discover Financial Services

13/11/2024 13:00

(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.

    Follow @JMAGuilford on X
    
    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)
 ((For previous columns by the author, Reuters customers can
click on  GUILFORD/  
Jonathan.Guilford@thomsonreuters.com))