(Bloomberg) -- The US election has much of Wall Street riveted. For merger-arbitrage traders, there’s a lot riding on the outcome, and a chance to revive their sagging fortunes.
Respondents in a recent Bloomberg News survey of these deal-focused traders said the outcome will be key for setting expectations on everything from deal flow to the antitrust climate and opportunities for trading on deals — all of which may turn in arbs’ favor if former President Donald Trump wins the presidency.
Simply getting past the election will remove uncertainty that has weighed on new deal announcements, setting the stage for a pickup in activity regardless of who wins. In October, public US company takeovers totaled just above $13 billion, a 90% drop from the same period last year.
Arbs’ playbook — betting on whether and when proposed deals will succeed — has become more complex over the past four years amid subdued deal activity, relatively high interest rates and an increasingly muscular regulatory regime under Democratic President Joe Biden. This year, the approach delivered one of the worst returns across hedge-fund strategies, according to data compiled by Bloomberg.
Just last week, a court decision to halt Tapestry Inc.’s $8.5 billion acquisition of rival handbag maker Capri Holdings Inc. blew up arbs’ wagers that the deal would go through, adding to traders’ disappointments while marking a major victory for the US Federal Trade Commission and its antitrust-focused leader Lina Khan.
The election may change that script. A win by Trump would likely translate into a more conducive deal environment, as a Republican administration would be more likely to scale back antitrust enforcement and result in leadership changes at the FTC and Justice Department, respondents said. Such a shift has the potential to significantly boost merger activity, particularly among large strategic buyers, ultimately creating a deeper mix of transactions for traders to wager on and simplifying the assessment of deal risks, they said.
“The thinking is that Republicans will be much more business-friendly and hands-off on regulation,” said Roy Behren, co-chief investment officer at Westchester Capital Management. “There were probably many deals that would have been announced but weren’t announced because the companies knew the hurdles are high under Lina Khan. Those dealmakers might come back to the table if she’s not longer in charge.”
A win by Vice President Kamala Harris would likely mean the current regulatory landscape remains largely unchanged, according to the poll. Still, with the Federal Reserve now easing monetary policy, that should improve financial conditions for private equity investors to deploy their dry powder in leveraged buyouts, some of the respondents added. Goldman Sachs Group’s top executive has a bullish outlook for dealmaking, citing investments in technology as a tailwind.
With the election just days away, arbs said they are watching a couple of deals that may be particularly sensitive to political pressures, especially in heavily regulated sectors.
One is Capital One Financial Corp.’s proposed $35 billion acquisition of Discover Financial Services, which six survey respondents predicted might see a higher chance of success — and thus a narrowing gap between its trading price and takeover offer— under a Trump administration. Right now the so-called deal spread, roughly $16, is one of the largest among pending situations.
Another high-profile case is the proposed $14 billion sale of United States Steel Corp. to a Japanese competitor. It has drawn opposition from unions as well as Biden. Some respondents believe it could gain traction under a new administration, though that is far from clear. The stock has climbed 12% this month but remains down 19% on the year.
Despite the prevalent view that Republicans are more business-friendly, the nature of antitrust policy in a potential second Trump term is a “wild card” and largely depends on who’s named to lead FTC and DOJ, Bloomberg Intelligence analysts Andrew Silverman and Jennifer Rie wrote in a report.
“Though some potential Republican enforcers maybe more amendable to settling problematic M&A than the incumbents, others maybe willing to continue the Biden administration’s aggressive, interventionist antitrust enforcement policies,” they wrote.
Ahead of any transition, survey respondents are currently cautious, predicting that only a handful of deals may come to fruition before the end of year. Among those, Altair Engineering was named as the most likely takeover target following a wave of software consolidations. On Wednesday, Siemens announced it was buying the company for $10 billion.
Other top picks include eye-care firm Bausch + Lomb Corp. that seeks to disentangle from its debt-laden parent company and GXO Logistics Inc., a 2021 spinoff from XPO Inc. that has been underperforming relative to peers.
Some see opportunity in the uncertainties around the election.
Read: UBS Hedge Fund Rides $4 Billion Bet on Merger-Arb Trade Revival
“Political change always introduces uncertainty in the regulatory outlook. We believe that this uncertainty is often overestimated by the broader market, which may provide those that specialize in quantifying these risks unique opportunities,” Blake Hiltabrand, UBS O’Connor’s head of business, said in an interview earlier this month. He noted this volatile period could allow arbs to initiate or add positions at attractive levels.
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