As M&A Market Shrinks, Event-Driven Hedge Funds Continue To Bet And Win Big

Mergers and acquisitions have been big business over the many years of ultra-low interest rates. While that’s changing somewhat due to plummeting deal volumes, some massive deals still look poised to go through, and hedge funds are betting big on such events.

Data from S&P Global Market Intelligence revealed a weak end to a depressed year of M&A activity in North America. The firm cited rising interest rates and the slowing economy for the year-over-year plunge in mergers and acquisitions in the U.S. and Canada.

A plummeting North American M&A market

According to S&P Global, the total deal value in North America fell 41.4% to $1.5 trillion in 2022. The number of transactions in the region tumbled 21.2% year over year to about 21,000. S&P Global reported that the second half of 2022 saw a sizable slowdown in M&A activity with $517.85 billion worth of deals, a decline of 38.2% from the first half of the year and less than half of the second half of 2021.

In 2021, M&A activity in North America was at a record high amid ultra-low interest rates and the Federal Reserve’s quantitative easing program, which flooded the markets with cash and cheap credit. The Fed turned off the faucet of cheap financing in 2022 due to runaway inflation.

As a result, Microsoft’s
MSFT
$69 billion acquisition of Activision Blizzard
ATVI
in January was the year’s largest deal, only slightly ahead of Broadcom’s
AVGO
$68 billion deal for VMware
VMW
. Tesla CEO Elon Musk’s embattled go-private takeover of Twitter was the third-largest deal of 2022 at $41.8 billion.

Hedge funds make a mint on Rogers-Shaw merger

Although it failed to be consummated in 2022 due to long-running antitrust concerns, Rogers Communications’ $16 billion bid for Shaw Communications finally looked like it could reach the finish line. Canada’s competition bureau dropped its plans to block the deal earlier this week, although the Canadian government still must give its stamp of approval. However, most experts expect the deal to close by the Jan. 31 deadline.

Reuters’ calculations based on Refinitiv Eikon data suggest the 12 hedge funds that bet on the Rogers-Shaw combination moving forward have raked in hundreds of millions of dollars since the deal was announced in March 2021.

Millennium Management reportedly has the largest position in Shaw and would’ve made a profit of C$44 million if it had held its nearly 7.6 million shares for the entire two years. Other hedge funds that had bet on the deal include Citadel, Canyon Capital and Carlson Capital.

Rogers-Shaw

In his fourth-quarter letter to investors, which was obtained by ValueWalk, Jesse Ho of Carlson Capital’s Black Diamond Arbitrage fund said the end of 2022 brought a “satisfying conclusion” to the court battle between the Canadian Competition Bureau and Rogers Communications.

Following weeks of hearings, Canada’s Competition Tribunal ruled in favor of Rogers and Shaw, rejecting all of the bureau’s core arguments. The tribunal doesn’t think the proposed arrangement will result in materially higher prices than those that would likely prevail without such an arrangement. The bureau filed for an appeal but decided to drop its attempts to block the merger earlier this week.

Like other M&A experts, Ho remains convinced that the Rogers-Shaw deal would go through, and now we know it will. His confidence partially stemmed from the tribunal’s determination that Rogers would’ve prevailed even if it rather than the Competition Bureau had carried the burden of proof regarding the planned divestiture of Freedom Wireless.

Ho expects Shaw shares to trade at a small, single-digit deal spread until the Jan. 24 hearing. They remained range-bound around $28 before surpassing $29 after the Competition Bureau dropped its attempt to block the merger.

Microsoft-Activision Blizzard

Ho also weighed in on some of the other big deals underway, including Microsoft’s $74 billion offer to acquire game maker Activision Blizzard. Now a year after the deal was announced, it looks like things are finally close to a turning point.

In December, the U.S. Federal Trade Commission sued to block the deal, and the trial is set to begin in August. Ho described the FTC’s complaint as “weak.” He noted that the agency included a “gerrymandered proposed console market that excludes Nintendo” and “scant evidence to support the notion that Activision Blizzard’s content is a critical input that Microsoft could profitably withhold.”

According to Ho, the FTC’s complaint also lacks any so-called “hot documents” that would suggest malicious intent. He sees an even bigger problem for the FTC’s case against the merger as the same problem the Department of Justice faced in its challenge of AT&T’s
T
acquisition of Time Warner in 2016.

Ho explains that when litigating vertical mergers, the government can’t benefit from a structural presumption to shift its burden of proof to the partners. Additionally, he noted that Microsoft has already offered a potent “behavioral remedy” to the merger concerns via access to Activision Blizzard’s Call of Duty franchise for up to 10 years.

The benefits of a behavioral remedy

By offering that remedy, Microsoft is enabling itself to litigate the fix similarly to how AT&T did in its “resounding victory” over the DOJ. However, he noted that Microsoft still needs to secure approval for the merger from the European Commission and the U.K. Competition and Markets Authority.

The CMA is expected to release its provisional findings late this month or early February. The EC has historically been more open to behavioral remedies to address vertical mergers, but the CMA is virtually untested in such a situation.

Despite the uncertainty around the CMA, Ho sees the 24% deal spread in the Microsoft-Activision merger as attractive relative to Carlson’s 18% estimated downside. If Microsoft secures approval for the deal outside the U.S., Ho is confident the parties will fight the FTC in court “with a case they should be positioned to win.”