(Bloomberg) -- Merger-arbitrage investors are eager to turn the page on 2024, as they bet that the incoming administration of President-elect Donald Trump will revive the battered strategy after a year filled with deal delays and busts.
With Federal Trade Commission chief Lina Khan pursuing an aggressive trustbusting agenda, investors absorbed a series of major setbacks this year on transactions including Tapestry Inc.’s handbag deal with Capri Holdings Ltd. and Kroger Co.’s takeover of Albertsons Cos. The crumbled trades dealt painful losses to funds wagering they’d close. The merger-arbitrage strategy has gained 3.3% this year through November, the worst among more than 30 hedge-fund styles tracked by Bloomberg.
The consensus, however, is that the outlook is about to get brighter for an M&A market that saw activity recover in 2024 as the Federal Reserve lowered interest rates. The hope is that Trump’s pro-business approach and the prospect of new leadership at the FTC and the Justice Department will pave the way for more big-ticket mergers and acquisitions. That would be a boon for arbs’ playbook, which involves betting on whether and when proposed mergers will close.
“The opportunity set is potentially epic: It’s going to be a lot of deal flow” after the last four years of potential deals not coming to fruition, said Drew Figdor, portfolio manager of the roughly $2 billion TIG Merger Arbitrage Strategy at AlTi Tiedemann Global. “Now you have the opposite,” with Trump poised to enter the White House and new officials set to handle antitrust matters, he said.
There’s already been a flurry of deals since the November election. Monday brought the announcement that the Nordstrom family is joining forces with a Mexico retailer to take its namesake department store private, ending months of speculation.
Of course, the key for arb investors is that in addition to a busier deal mix, that higher numbers will cross the finish line. The value of US transactions announced is up 11% this year, rebounding from last year’s decade-low, data compiled by Bloomberg show. But that did little help to arbs’ performance as regulators also boosted their scrutiny of mergers.
Among deals that received second requests from the FTC, where officials ran in-depth reviews, the agency eventually sued to block about 30%, or approximately 27% when combining the FTC and DOJ, according to data tracked by Evren Ergin, head of special situations advisory at UBS Securities. These so-called enforcement rates have been running at record levels, around three times the historical frequency since 1998, he said.
The contrast illustrates how prior administrations were more willing to negotiate a settlement, allowing some problematic deals to go through with conditions, such as divesting assets, market watchers say.
“Outcome predictability is likely to rise going forward, but investors may want to wait to see a few test cases before regaining confidence,” Ergin said.
Another possible shift, he said, could be in deal spreads. Questions in the earlier part of President Joe Biden’s administration about what to expect, and then the pattern of repeated enforcement actions kept spreads wider for longer for a large group of transactions, and fairly tight for another group that didn’t raise significant issues, he said.
“The distribution is likely to become less bipolar,” he said.
That said, the market shouldn’t expect a complete reversal on antitrust enforcement. The populist streak seen in Trump’s picks for this area means that aggressive scrutiny of big tech and certain other industries is still likely, said Jennifer Rie at Bloomberg Intelligence.
What’s more, the level of scrutiny applied may be erratic depending on Trump’s view of deals, which risks surprising markets, she said. She noted that during Trump’s first term, for instance, the DOJ made a controversial move to block AT&T Inc.’s $85 billion bid to buy Time Warner Inc.
Some funds managed to navigate through the recent regulatory headwinds.
“There have been a lot of potholes and a lot of problematic deals that caused stress — fortunately we missed most of them,” including Capri and Kroger-Albertsons, said Paul Glazer of Glazer Capital, whose $2 billion fund rose 7.9% this year through Dec. 19.
“If you think about the environment, there was a decent volume of deals and pretty good dispersion and some volatility in spreads,” he said. “Those were all helpful to returns if you’re not on the wrong side and could put the cash in deals that are going to close.”
(Updates to add firm name in fourth paragraph.)
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